Employers can offer their employees access to a tax-free salary reduction arrangement that can be used to pay public transportation expenses such as monthly bus, subway, or commuter rail passes. Prior to the Tax Increase Prevention Act of 2014 (TIPA), which was signed into law on Dec. 19, 2014, the amount of an employee’s salary that could be reduced tax-free was limited to $130 per month. TIPA retroactively increases the 2014 tax-free amount to $250 per month.
Employers who limited 2014 qualified mass transit benefits to their employees to $130 per month cannot retroactively increase the benefit as a result of the legislation. However, any employer who allowed an employee to claim a mass transit benefit of up to $250 per month in 2014 but subjected the amount more than $130 per month to tax on previously filed employment tax returns may use a special administrative procedure provided in Notice 2015-2 to remove the additional amount from the employee’s taxable wages and obtain payroll tax refunds. No refund of federal income tax withholding is available.
In order to take advantage of the administrative procedure, employers must repay or reimburse employees for the employees’ share of 2014 Federal Insurance Contributions Act (FICA) and Medicare taxes on the retroactive increase in qualified transportation benefits. Notice 2015-2 also provides detailed instructions for reporting the wage reduction and obtaining a refund of previously paid payroll taxes. Businesses that already have issued IRS Form W-2, “Wage and Tax Statement,” to their employees will be required to issue corrected W-2s and obtain consent from their employees to file a claim for refund on their behalf.
The increase to qualified mass transit benefits was extended only to Dec. 31, 2014. Absent future congressional action, the maximum monthly benefit for 2015 returns to $130.