On January 11, 2016, the Internal Revenue Service (IRS) released new guidance on qualified transit benefits (QTB) that impacts both 2015 and 2016 employer plans. The IRS guidance includes a retroactive transit benefit increase that affects employers offering a commuter or transit benefit plan in 2015 that provided both pretax and after tax benefits.
QTB, often referred to as “commuter” or “transit” benefits allow employers and employees to make pretax contributions to designated accounts for the reimbursement of qualified parking or mass transit expenses incurred by the employee in order to commute to work. As with other pretax benefit account plans, QTB benefits allow the employer and the employee to save money, as funds are exempt from personal income taxes and from payroll taxes (FICA/FUTA).
Federal tax law sets monthly limits, on the amount eligible for pretax reimbursement. Previously, 2015 monthly limits on pretax QTB benefits were as follows:
- $250 for parking expenses.
- $130 for mass transit and vanpooling expenses.
The IRS’ recent guidance changes the 2015 monthly limit, retroactively, on pretax mass transit/vanpooling benefits, increasing the monthly limit from $130 to $250. It is important to note that while the increase applies retroactively to January 1, 2015, it does not impact pretax-only plans since pretax benefit elections cannot be changed retroactively.
For employers that offered both pretax and after tax benefits in 2015 the new guidance will require administrative actions. Any employers whose 2015 plans provided reimbursement benefits up to $250 per month for mass transit/vanpooling benefits will need to work with their payroll administrators and tax advisors to ensure that 2015 Forms W-2 and 941 (and any equivalent forms) are prepared or revised correctly.
The IRS also announced the following monthly QTB limit increases for 2016:
- $255 for parking expenses.
- $255 for mass transit and vanpooling expenses.
The 2016 limits are in parity as a result of the establishment of a new law in December 2015 that requires parking and mass transit benefits to be in permanent parity in 2016 and beyond. This means that in future years, mass transit/vanpooling and parking limits will always be equal to one another.