IRS Updates Guidance on Transportation Fringe - FYI

Volume 37 | Issue 184 | December 22, 2014
IRS Updates Guidance on Transportation Fringe
Benefits Provided Through Electronic Media
Incorporating technological changes, the IRS recently updated its guidance on employers’ use
of smartcards, debit cards, and other electronic media to provide their employees with qualified
transportation benefits on a pre-tax basis. Under this guidance, the value of transit benefits
provided via cards restricted to use as transit fare, or to purchase transit fare, can be excluded
from gross income, as can delivery charges for passes purchased online. Beginning December
31, 2015, an employer may not use cash reimbursements for qualified transportation benefits
where terminal-restricted debit cards are readily available. Employers should review their
existing use of electronic media to provide qualified transportation benefits, and modify and
update procedures as necessary.
Code section 132 provides that “qualified transportation benefits” are excluded from gross income. This means that
employers can pay certain transportation costs — including transit passes, qualified parking, and transportation in a
commuter highway vehicle between home and work — and employees can exclude the value of these benefits
from their gross income. The maximum amount that an employee may exclude from gross income and wages for
2015 is $130 per month for transportation in a commuter highway vehicle and transit passes (in the aggregate), and
$250 per month for qualified parking. The limits are adjusted each year for inflation.
Comment. Congress recently passed a bill that retroactively raised the
monthly mass-transit subsidy from $130 to $250, but only for 2014.
President Barack Obama signed this bill into law last week. For more
information on this bill and related administrative issues, please see our
December 18, 2014 For Your Information.
Employers can provide qualified transportation benefits directly by purchasing transit
passes and distributing them to employees, or indirectly by distributing vouchers
accepted by mass transit operators (such as trains, subways, and busses) as fare
Volume 37 | Issue 184 | December 22, 2014
Electronic Transit Terminology
Fare media – methods by which
transit fares are paid, including fare
cards, passes, transfers, tickets, and
Smartcard – card containing a
memory chip that stores information
uniquely identifying the card and the
value stored on it, and can be used
either to pay a fare or purchase fare
payment, e.g. the SmarTrip card used
by the Washington Metropolitan Area
Transit Authority
Terminal-restricted debit card –
card that can be used only at vendors
that only sell fare media (and nothing
else), e.g. the Bay Area Clipper
commuter debit card
Merchant category code (MCC)restricted debit card – card that can
be used to make a purchase from an
approved vendor that sells a variety of
merchandise, e.g., the TRANServ
Debit Card available to certain federal
media or in exchange for fare media. In providing benefits indirectly,
an employer must use any “readily available” voucher (or similar item)
that may be exchanged only for a transit pass given directly to the
employee. The IRS considers a voucher readily available if the
employer can obtain it without charges greater than 1 percent of the
average annual value of the voucher, and without other restrictions.
Where a voucher is not readily available, an employer may reimburse
employees for transportation benefits — but only under a “bona fide
reimbursement arrangement” that (1) only provides payment for
expenses that have already been incurred (and not those that are
expected to be incurred in the future), and (2) requires some form of
employee substantiation. Employee substantiation is not required for
in-kind distribution of transit passes or vouchers.
Responding to the increased availability of electronic transit media,
the IRS first addressed the use of that media for employer-provided
transportation benefits in Revenue Ruling 2006-57. Under that
guidance, smartcards, debit cards, and other electronic media funded
and distributed by an employer are generally treated as vouchers so
long as they can only be used to purchase transit passes and no
other items. Otherwise, cash reimbursement rules apply — including
to debit cards usable only at vendors assigned a merchant category
code (MCC) indicating that they sell fare media, in addition to other
items. For more information on the 2006 guidance, please see our
December 14, 2006 For Your Information.
Updated Guidance on Electronic Media
Revenue Ruling 2014-32 reaffirms parts of, modifies, and supersedes Revenue Ruling 2006-57 and other prior
guidance on the use of transit cards, debit cards, and cash reimbursement arrangements. The takeaways from this
ruling are as follows:
Cards usable only as fare media, or only to purchase fare media, are qualified transit passes excludable
from employee gross income, including:
Smartcards that can only be used as fare media
Terminal-restricted debit cards that can only be used at vendors that only sell fare media for a transit system
Terminal-restricted debit cards that can be used only at vendors that have been assigned an MCC but also sell
merchandise other than transit fare media (for example, grocery stores that sell transit passes) — so long as
the cards only work to purchase fare media
Comment. These types of cards are sometimes referred to as “locked” cards because, while
they allow for the purchase of fare media, they cannot be used to buy other items.
Volume 37 | Issue 184 | December 22, 2014
Delivery charges for transit passes employees purchase online are included as part of the transit benefit.
Where employees obtain a qualified transit pass online, a delivery charge for the pass may be excluded from
income along with the value of the pass itself.
Cash reimbursement arrangements are no longer permitted where terminal-restricted debit cards are
readily available. Beginning December 31, 2015, employers cannot reimburse employees in cash for transit
benefits if a terminal-restricted debit card is readily available in the relevant geographic area.
Purchases made using an MCC-restricted debit card that require a cash reimbursement arrangement must
meet specific requirements:
Advances — rather than reimbursements — are not permitted. During the first month of participation, an
employee must pay for the fare media with after-tax dollars and substantiate those amounts before the
employer may reimburse. For subsequent months, the employer may reimburse the employee for fare media
substantiated by periodic MCC-restricted debit card statements providing sufficient information on the card’s
Comment. Substantiation requirements can present a considerable administrative burden on
employees and employers alike. Employees have to pay with after-tax dollars at the outset and
keep their used passes, and the employer is responsible both for initial verification as well as
spot checks on the use of the debit card.
The IRS provides a similar substantiation obligation for qualified expenses paid or reimbursed
under a health FSA or dependent care assistance program (DCAP) provided through a
cafeteria plan. Although a qualified transportation plan can be offered alongside a cafeteria
plan, it must be a separate and distinct arrangement.
Employee certifications are required. For the first month the card is used, prior to receiving reimbursement, the
employee must certify that the card was only used to purchase fare media. For subsequent months, no
certification is required prior to reimbursement of expenses that match the vendor and time period covered for
expenses previously substantiated. However, an employee must provide a certification once annually.
Smartcards with separate accounts for transit and non-transit use will qualify as transit passes only if the
employer purchases the card and distributes transit funds to employee accounts. An employer-provided
debit card that an employee can use to fund transit or non-transit benefits available via a smartcard will not qualify
as a transit pass.
In Closing
Qualified transportation benefits may be more attractive to employers as well as employees now that more transit
systems are using electronic payment methods. In response to changing technologies, the IRS has updated its
rules for qualified transportation fringe benefits to expand the types of vendors from which employees may
purchase transit fare and to include delivery charges for online employee purchases as part of the benefit.
Nevertheless, employers in areas where transit system vouchers are not yet readily available may continue to find
the administration of cash reimbursement arrangements burdensome.
Volume 37 | Issue 184 | December 22, 2014
Julia Zuckerman, JD
Nancy Vary, JD
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