Procedural options for reporting higher pre-tax contributions
On December 19, 2014, President Obama signed a package of tax extenders which included an extension of pre-tax mass transit parity with parking for 2014. As a result, the allowable pre-tax mass transit limit for 2014 allows for a Transit Limit Increase from $130 to $250 per month. The higher limit is effective from 1/1/2014 through 12/31/2014. The monthly mass transit limits for 2015 are not impacted by the passage of this bill and will remain at $130 unless further legislative action is taken.
While a retroactive limit increase is not an ideal situation, employers can follow these easy (or relatively easy) steps to take advantage of the increased limit.
Step 1: Determine the adjustable amount for employees who had mass transit deductions in excess of $130 (up to $250 per month). Up to $120 of after-tax deductions can now be re-categorized as pre-tax.
Step 2: Record a tax adjustment journal entry in your payroll system for the adjustable amount.
Step 3: Reimburse employees for the overpayment of taxes (if necessary). If the adjustment is made with the final payroll for 2014, this will generally occur automatically. If the adjustment is made as a separate payment, employees will generally need to receive a reimbursement. Consult your payroll processor to confirm the process you should use.
Step 4: Ensure employees’ W-2 documents reflect the journal entry adjustments to taxable income. Please note, if you have already closed out your payroll for 2014 or paid your quarterly employer taxes, contact your tax advisor or payroll processor to determine whether additional documentation is required.
Resources for calculating the adjustments: To assist employers in calculating the adjustments, employers may be able to access reports from their commuter benefits plan administrator, such as Benefit Resource, or leverage data from your payroll system to calculate these adjustments.
Process considerations: The change is only effective for 2014 and will revert back to the $130 limit per month for 2015. Employers may want to consider calculating one taxable adjustment encompassing the entire 2014 calendar year, rather than changing the pre-tax/after-tax split for the last mass transit payroll deduction in 2014 and then having to change it back again for the first payroll deduction in 2015.
While these recommendations are based on previous guidance issued for administering retroactive changes, there has been no formal guidance to date on this specific change. While we recognize there may be participants who previously elected $130 and would now like to increase their election based on the $250 pre-tax limit, there has been no current or prior guidance that has permitted this. If additional guidance is made available, we will communicate any changes and impacts.
Please consult your tax advisor or payroll processor for recommendations on the specific actions you should take.