Yesterday, the Internal Revenue Service (IRS) released Notice 2015-2 providing guidance on the retroactive transit benefit increase recently enacted by Congress. Employers that offered a commuter or transit benefit plan in 2014 must comply with the guidance if their 2014 plan had provided both pretax and aftertax benefits. No action is required, however, for employers that did not offer a transit benefit plan in 2014 or whose plan provided benefits only on a pretax basis.
Many employers sponsor a qualified transportation benefit (QTB) plan which often is referred to as a “commuter benefit,” “transit benefit,” or Internal Revenue Code § 132 plan. These plans allow employers and employees to make pretax contributions to QTB accounts and then use the funds to reimburse the employee’s qualified parking expenses or qualified mass transit expenses. Pretax contributions save money, both for the employer and employee, since the funds are exempt from personal income taxes and from payroll taxes (FICA/FUTA). Federal tax law sets monthly limits, however, on the amount eligible for pretax reimbursement.
For 2014, the monthly limits on pretax commuter benefits were:
- $250 for parking expenses.
- $130 for mass transit and vanpooling expenses.
In late December, Congress passed and the President signed legislation that increased the 2014 monthly limit for pretax mass transit/vanpooling benefits from $130 to $250. Although the increase applies retroactively to January 1, 2014, it has no effect on pretax-only plans since pretax benefit elections cannot be changed retroactively.
The change does affect employer plans that provided both pretax and aftertax benefits in 2014. For instance, if the employer’s 2014 plan was designed to provide up to $250 per month for mass transit/vanpooling benefits, the first $130 was on a pretax basis while the additional $120 was an aftertax benefit. In that case, the employer now must follow the administrative procedures outlined in IRS Notice 2015-2 so that the entire $250 per month can be reported as a pretax benefit. Employers should work with their payroll administrators and tax advisors to ensure that 2014 W-2s and 2014 FICA/FUTA filings are prepared or revised correctly.
Lastly, note that there is no change with respect to 2015 benefits. For 2015, pretax benefits are limited to $250 for parking expenses and $130 for mass transit/vanpooling expenses each month.