Qualified transportation fringe benefits
Posted on 04/17/2017 at 10:30 AM by David Repp
Commuting to and from the workplace is ordinarily not a deductible expense for an employee. Chong v. Commissioner, T.C. Memo 1996-232. However, if an employer pays certain commuting expenses of an employee as an employee fringe benefit, the employee may exclude the value of such benefit up to $255 per month from taxable gross income, adjusted for inflation (2017 figure). I.R.C. §§ 132(a)(5) & (f)(2)(A). The commuting expenses that qualify for exclusion if paid by the employer include mass transit passes and vanpooling in an employer-provided "commuter highway vehicle." I.R.C. § 132(f)(1). Included as types of qualifying mass transit passes are any type of pass, token, farecard, voucher or similar item for a bus, train or subway for use to and from the employee's workplace. I.R.C. § 132(f)(5)(A). Transportation benefits employers provide through smartcards, debit or credit cards, or other electronic media are transit passes only if the fare media value stored on the cards is usable only as fare media for a mass transit system and the amount allocated to the cards each month does not exceed the maximum excludable amount. IRS Information Letter (INFO 2010-0146); Rev. Rule 2014-32; PLR 201532016. Under Reg. § 1.132-9, Q&As 18 and 19, substantiation of transit pass usage is not a requirement for receiving tax-favored treatment. Thus, employers may credit up to $255 (in 2017) in transit pass benefits to their employees' smartcards each month on a tax-free basis without requiring them to show how they use the transit benefits.
An employer can also pay the parking expenses of an employee and the employee will not have to include the value of such parking in his or her taxable gross income. I.R.C. § 132(f)(1)(C). In other words, employer-paid parking can be a tax-free fringe benefit to the employee. The maximum monthly parking that can be excluded from an employee's income is $255 in 2017, as adjusted for inflation. I.R.C. § 132(f)(6). Employers may provide parking benefits only by reimbursing their employees for qualified parking expenses that they in fact incurred. Rather than reimbursing employees in actual cash, some employers may choose to make reimbursements by crediting the reimbursed amounts onto employees' smartcards. IRS Information Letter (INFO 2010-0146); Rev. Rul. 2014-32. Under Reg. § 1.132-9, Q&A 16(c), employers must establish a bona fide reimbursement arrangement that is reasonably calculated to ensure that the employee in fact incurred expenses in an amount equal to the reimbursement (e.g., requiring employees to provide receipts or other records substantiating the parking costs that they incurred).
In lieu of receiving mass transit or parking fringe benefits, an employee may receive up to $20 per month if the employee regularly uses his or her bicycle to commute to work. I.R.C. § 132(f)(1)(D).
There are no discrimination rules affecting the availability of the qualified transportation expenses described above, so employers may pick and choose the groups of employees it desires to benefit. However, sole proprietors, partners, independent contractors and two-percent shareholders in an S corporation are not eligible because they are not considered employees. Any transportation benefits provided to such owners may have to be included in their taxable gross income. Alternatively, such owners may be able to exclude parking benefits as a working condition fringe benefit pursuant to the argument that employer-provided parking benefits the employer by virtue of the employer’s choice of work location. IRS Notice 94-3.
Since 1998, employers may allow their employees to elect to defer a portion of their salary to pay for qualified transportation expenses on a pre-tax basis. I.R.C. § 132(f)(4). This method of paying expenses is similar to medical and child care expenses provided under an I.R.C. § 125 cafeteria plan except that the qualified transportation expenses do not require a "use-it-or-lose-it" provision. In other words, if the amount withheld from an employee's salary exceeds the amount of the expenditures for qualified transportation expenses, the excess can be carried over to use for subsequent qualified transportation expenses. Treas. Reg. § 1.132-9(b) Q&A-15. However, for qualified parking expenses, the amount rolled over from a prior month plus the amount reimbursed by the employer for a current month cannot exceed the monthly maximum exclusion amount. IRS Information Letter (INFO 2010-0146). Such is not the case for transit passes (which does not have a substantiation requirement). In all situations, unused contributions cannot be refunded to the employee. Treas. Reg. § 1.132-9(b) Q&A-14. The election to defer salary for qualified transportation expenses should be made by the employee before the employee is entitled to receive the salary and should relate to transportation expenses incurred after the election. Treas. Reg. § 1.132-9(b) Q&A-14. In addition, the deferred salary should be segregated into a separate accounts for each employee. The employer can use the funds to pay the transportation or parking vendor directly or to reimburse the employee after the employee has provided proper substantiation to document his or her expenditure.
Apparently, at least one IRS employee believes that an employer cannot charge an employee for parking with pre-tax dollars. In an Information Letter made public on April 13, 2017, the IRS denied exclusion of employees’ income for parking that an employer made available to employees. IRS Information Letter 2017-0007. In the Letter, the IRS described the facts are as follows: An employer pays a parking vendor directly for certain parking spots. Employees who wish to use the secure parking must agree, in writing, to reimburse the employer by having the monthly parking fee deducted from their paycheck in the month prior to using the parking. The employer reduced the electing employees’ after-tax compensation by the amount of the employer’s cost of the parking. The IRS held that arrangements where an employer purchases parking spots from a parking vendor and then, in turn, permits employees who wish to use the parking spots to pay the employer for the parking spots using the employees' own after-tax compensation do not meet the definition of qualified parking in the Code and Regulations. The explanation provided by the IRS was that the only circumstances that an employee can exclude parking expenses from an employee’s taxable income is if:
1. The parking is on property that the employer owns or leases;
2. The employer pays for the parking; or
3. The employer reimburses the employee for parking expenses.
Provisions 1. and 2., only apply, according to the IRS, when no reimbursements take place. In other words, 1. and 2. will apply only if the employer provides parking free of charge to its employees. Provision 3. does not apply, according to the IRS, because the parking was reimbursed by the employee. Provision 3. suggests that only the employer can reimburse the employee.
“Reimbursements provided in place of pay are called compensation reduction arrangements. Under compensation reduction arrangements, the employer permits the employees to elect to reduce their taxable compensation in order to receive tax-free reimbursements for parking expenses that the employees have actually incurred. Arrangements where an employer purchases parking spots from a parking vendor and then, in turn, permits employees who wish to use the parking spots to pay the employer for the parking spots using the employees' own after-tax compensation do not meet the definition of qualified parking in the Code and Regulations.”
This seems a matter of bad semantics and just plain wrong. Compare this to employer provided health insurance which is also a tax-free benefit made available to electing employees. It is very common for employers to make employees pay for part or all of such health insurance through salary reduction agreements using a Section 125 Cafeteria Plan. Although Section 125 Cafeteria Plans are not allowed to provide parking as a tax-free benefit, the salary reduction provisions of Section 132 are supposed to work the same way. So, how could this have turned out differently? Either the employer can provide the parking to the employee without reimbursement, or the employee must contract directly without a third party parking vendor and seek reimbursement of such costs from the employer. This seems a ridiculous formality.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- David Repp
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