January 13, 2015

Guidance on Correcting Withholding for Qualified Transportation Expenses (Article)

As mentioned in our year-end At Issue, President Obama signed a law (“Tax Increase Prevention Act of 2014”) that includes a broad array of tax extenders, among other provisions.  Of particular note, this law reinstates parity in the exclusion for employer-provided mass transit and parking benefits of a qualified transportation program.  For 2014 and 2015, the limit on commuter highway vehicle (van pooling) and transit pass is $130; the qualified parking limit is $250.  For the 2014 tax year only, this law increases the van pooling and transit pass limit to match the parking limit. 


The IRS subsequently issued guidance (IRS Notice 2015-02) relating to how employers can correct the withholding amounts on these transportation expenses retroactively for the 2014 tax year.  First, the guidance clarifies that employees cannot retroactively increase their 2014 compensation reduction elections to use the higher transit benefit limit, nor can they take additional compensation reductions in 2015 to pay for 2014 transit expenses.  Secondly, in order to correct transit benefit amounts prior to the law’s enactment, the IRS establishes an administrative procedure for employers who have already filed their 4th quarter Form 941 for the 2014 tax year; and a separate procedure for employers who have not yet filed their 4th quarter Form.  In addition, employers correcting these amounts would reflect the changes on the Form W-2

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