Pre-Tax Parking, Van Pooling, and Mass Transit Pass Programs

The IRS has just published Proposed Regulations on .qualified transportation fringe benefits. that provide guidance for employers interested in offering pre-tax parking, commuter highway vehicle (van pooling), or mass transit pass programs. Over the past several years, changes Congress made to Internal Revenue Code Section 132(f) created the possibility for employee pre-tax elections under such programs, but the operational rules were not clear. The Proposed Regulations attempt to address most of the areas that were previously uncertain.

The Proposed Regulations confirm that employers may offer employer-provided parking, van pooling, or mass transit passes as a tax-free benefit pursuant to an elective pre-tax salary reduction arrangement. The amount by which the employee.s pay is reduced and the value of the parking, van pooling, or transit benefits provided to the employee is excluded from compensation for both income and FICA taxes. Of course, the non-taxable benefits are subject to the statutory dollar limits (currently $175 per month for parking and $65 per month for van pooling and transit passes).

The Proposed Regulations state that the employer may provide the parking or van pooling benefit by reimbursing the employee in cash for expenses the employee has paid. That is, the employer does not have to provide the actual parking facility or van pooling itself or arrange for direct payment for such services.

However, the Proposed Regulations impose special rules before cash reimbursement to the employee for the expense of mass transit passes would be permitted as a non-taxable benefit. Cash reimbursement is allowed .only if no voucher or similar item that may be exchanged only for a transit pass is readily available for direct distribution by the employer to employees.. The Proposed Regulations then go into considerable detail regarding when such vouchers or similar items are deemed .readily available.. In the Twin Cities area, for example, the bus passes that Metro Transit makes available through employers may prevent many employers from reimbursing employees for bus fares the employee has paid.

The Proposed Regulations indicate that the salary reduction election must be irrevocable for the period in which the parking, van pooling, or transit benefit is available. They specifically state that salary reduction amounts cannot be refundable. That is, the employer cannot cash out unused salary reduction amounts if the employee.s salary reduction exceeds the actual parking, van pooling, or transit benefit provided to the employee.

However, the Proposed Regulations also say that unused amounts may be carried over to subsequent periods. Unlike flexible spending accounts in a cafeteria plan arrangement, there is no annual .use it or lose it. rule. While unused amounts cannot be cashed out, they do not need to be forfeited, and instead can be carried over to provide parking, van pooling, or transit benefits to the employee in subsequent years. Of course, because the salary reduction amounts are not refundable, forfeitures are likely to occur upon termination of employment.

The Proposed Regulations also require that the salary reduction election must be prospective and for a fixed dollar amount or fixed percentage of compensation. The employer cannot provide for reimbursement through a salary reduction arrangement of parking, van pooling, or transit expenses that have already been incurred by the employee before the election. Nor could the employer provide for variable salary reduction amounts determined after the employee submits a reimbursement request (a .zero balance reimbursement account. approach).

The Proposed Regulations also offer some guidance regarding the substantiation requirements for employer reimbursement of transportation expenses.

Employers offering pre-tax qualified transportation fringe benefits should review the terms of their other pay-based employee benefit plans to determine the potential impact of salary reduction elections made in exchange for transportation benefits. For example, the current rules under Internal Revenue Code Sections 414(s) and 415 (for purposes of a retirement plan.s nondiscriminatory safe-harbor definition of compensation or the 25% of compensation contribution limit, respectively) do not provide for adding back Section 132(f) salary reduction amounts, even though they do provide for adding back Section 401(k) and Section 125 salary reduction amounts. Salary reductions made in exchange for transportation benefits may also affect the benefit level under an employer.s life insurance or disability income plans.

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