Earlier this month we reported on the American Taxpayer Relief Act of 2012 (ATRA), and its impact on employee fringe benefits. One change under ATRA that left employers scratching their heads was the retroactive nature of the increase to the maximum pre-tax contribution for mass transit and vanpool expense benefits from $125 per month to $240 per month, effective January 1, 2012.
In follow-up to a flood of questions received from employers, the IRS issued Notice 2013-8 outlining what an employer must do to correct the additional wages that were originally treated as taxable for FICA purposes. Affected employers acting quickly may be eligible for some relief as provided under the special administrative procedures described in the Notice. Keep in mind the procedure discussed below only applies to FICA (Social Security and Medicare) taxes. The procedure below does not allow for the adjustment of overpaid income taxes.
To clarify, the obligation to treat excess mass transit benefits—those benefits in excess of $125 per month but less than $240 per month—as pre-tax for 2012, only applies with respect to employer and employee elections actually made for the 2012 plan year. We assume most employers’ plans limited the maximum benefit amount to $125 per month, the Code limit at the time elections for 2012 were made. In that case, the employer has nothing to do. Employees cannot go back and increase their election to $240 per month. But for employers who provided benefits in excess of $125 per month in 2012, the outcome is not that simple. The remainder of our discussion will focus on the various procedures for excluding these excess benefits from employees’ gross income and wages.
Corrections to 2012 Forms 941 – Employer’s Quarterly Federal Tax Return
The IRS provided a special administrative procedure for employers to use in filing their fourth quarter 2012 Forms 941. In order to take advantage of this relief, employers must repay or reimburse their employees the excess FICA taxes for all four quarters in 2012 before filing their fourth quarter Forms 941. When reporting amounts, the employer may reduce the fourth quarter wages, tips, and compensation amounts on line 2, the taxable Social Security wages on line 5a, and the Medicare wages and tips on line 5c by the excess transit benefits for all four quarters in 2012. If the employer has not refunded any overpayment to employees or has already filed its fourth quarter Form 941, the employer must use a Form 941-X for each quarter in which it seeks an adjustment for and secure written consent from employees did not (or will not) make a claim for overcollected FICA amounts.
Corrections to 2012 Forms W-2
Similarly, the IRS provided a special administrative procedure for employers who have not yet furnished 2012 Forms W-2, which is due to employees by January 31, 2013. Employers should take into account the excess exclusion for transit benefits when reporting the amount of wages, tips, and compensation in box 1, the taxable Social Security wages in box 3, and the Medicare wages and tips in box 5. If employers have already reimbursed employees for the excess FICA taxes, withheld amounts reported in box 4 for the Social Security tax and box 6 for the Medicare tax should also be disclosed. For all cases, however, the Federal income tax withheld in box 2 should reflect the amount of income tax actually withheld in 2012. The additional income tax withholding will be applied against the employee’s individual income tax return – Form 1040.
Where employers have already furnished Forms W-2 to their employees, but not yet to the Social Security Administration (SSA), check the “VOID” box at the top of each incorrect Form W-2 on Copy A. Prepare new Forms W-2, submitting Copy A to the SSA and Copy B and C to employees with “CORRECTED” at the top of the form.
Employers who have submitted Forms W-2 to the SSA and their employees will need to prepare and file Forms W-2c, Corrected Wage and Tax Statement.