January 23, 2001
IRS Issues Final Regulations on Qualified Transportation Fringe Benefits
Internal Revenue Code (IRC) §132 governs "qualified transportation fringe benefits," a category that includes employer-provided passes for mass transit, reimbursement for parking and employer-provided transportation in a commuter highway vehicle (vanpools). On January 11, 2001, the Internal Revenue Service (IRS) published final regulations on qualified transportation fringe benefits. The final regulations are similar to proposed regulations that were issued in January 2000. This Compliance Alert notes new guidance in the final regulations, which generally apply to taxable years beginning after December 31, 2001.
Qualified Transit Passes and Commuter Vanpools
The combined limit on tax-free benefits for transit passes and commuter vanpools is $65 per month through December 31, 2001, and $100 per month thereafter. An employer only can provide cash reimbursement for mass transit expenses if vouchers or similar items that can only be exchanged for a transit pass are not "readily available." In other words, if vouchers are readily available, the employer must use them instead of cash reimbursement. The final regulations clarify the following with respect to transit passes:
- When Vouchers Are "Not Readily Available" The regulations provide that a voucher is considered readily available if an employer can obtain it on terms no less favorable than those available to an individual employee and without incurring a significant administrative cost. The determination of whether obtaining a voucher would result in a significant administrative cost is made with respect to each transit system voucher. Administrative costs are considered significant if the average monthly administrative costs incurred by the employer for a voucher (disregarding delivery charges imposed by the provider to the extent not in excess of $15 per order) are more than 1 percent of the average monthly value of the vouchers for a system. Only voucher provider fees — not the employer's internal administrative costs — are considered for determining this 1 percent safe harbor, which applies to taxable years beginning after December 31, 2003, to allow time for modifying systems and procedures, if necessary. The final regulations also provide guidance for employers that deal with multiple transit system vouchers. Certain nonfinancial restrictions also can cause vouchers to not be readily available. Examples include a provider not making vouchers available for purchase at reasonable intervals, or in appropriate quantities or denominations, or failing to provide the vouchers within a reasonable period after receiving payment.
- Rules for Advance Distribution of Transit Passes The final regulations permit transit passes to be distributed in advance for more than one month (such as for a calendar quarter) by taking into account the monthly limits for all months for which the passes are distributed. If an employee who has received a pass in advance terminates employment before the beginning of the last month in period covered by the pass, the value of the last month's pass is excluded from wages for employment tax purposes (but not for income tax purposes -- this differs from an announcement made in October 2000). There is an exception if at the time the passes were distributed there was an established termination date that was before the beginning of the last month of that period, such as when the employee already has announced his or her intent to retire.
IRC §132 defines qualified parking as parking provided to an employee on or near the employer's business premises. The limit for qualified parking is $175 per month.
The final regulations clarify what is considered qualified parking. Qualified parking includes parking on or near a work location at which the employee performs services for the employer, but does not include reimbursement for parking that otherwise is excludable from employees' income as a reimbursement under an "accountable plan" (i.e., one that requires employees to submit receipts to the employer) for employee reimbursement or parking provided in kind that is excludable from income as a "working condition fringe."
Under the regulations, where an employee receives cash reimbursement for qualified transportation expenses, he or she must provide documentation to the employer that the funds were used for a qualified transportation expense. Where receipts are provided, such as by a parking lot, the receipt can constitute the documentation. Where receipts are not available, however, an employee statement that the expenses were used for qualified transportation expenses generally will suffice. The degree of substantiation required depends on the surrounding facts and circumstances.
Where the employer maintains a program under which employees can choose between current cash compensation and qualified transportation fringes, the employer must keep appropriate written records of employees' salary reduction elections. However, to prevent the administrative requirements of salary reduction arrangements from becoming overly burdensome, the regulations provide that (1) there are no substantiation requirements if the employer distributes transit passes in kind; (2) a salary reduction election may be made electronically and can be renewed automatically; (3) employers can provide for deemed salary reduction elections (i.e., employee will be deemed to have elected salary reduction unless he or she affirmatively rejects it); and (4) an employer can distribute a voucher in-kind by having another person, such as the transit operator, distribute the voucher on the employer's behalf.
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The final regulations are minimum standards. An employer can maintain a transit program that is more restrictive and it still will constitute a qualified transportation fringe under IRC §132(f).
Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.