The American Taxpayer Relief Act retroactively increased the monthly transit pass exclusion from $125 to $240 for 2012. This exclusion applies to both income and employment taxes (e.g., FICA and FUTA), and applies for transit passes paid through the employers payroll system-either as an employer provided benefit or through employee salary deferrals.
To help implement this change, the Internal Revenue Service (IRS) issued Notice 2013-8 (http://www.irs.gov/pub/irs-drop/n-13-08.pdf), which explains the process for reflecting the exclusion properly on Forms W-2 and 941 (or W-2c and 941-X), and also provided limited relief for those employers who did not yet file their fourth quarter, 2012 Form 941.
The IRS also issued informal guidance that indicated that this relief is mandatory, and failure to properly reflect the exclusion could result in tax reporting penalties on the employer (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Retroactive-Increase-in-Excludible-Transit-Benefits). Therefore, although the amounts involved are small, we anticipate many employers will make the adjustment on Form W-2, and employers are encouraged to file for a refund of the employee and employer share of FICA taxes on Forms 941-X.
If you have any questions regarding the change or implementing the correction, please call your regular Groom contact or Elizabeth Dold.