The IRS Office of Chief Counsel has issued a memorandum clarifying the employment tax treatment of retroactive transit benefits. Several employers provided employees with transit benefits that did not exceed the statutory limit in Code Sec. 132(f) at the time. However, Congress retroactively raised the transit limit over the years three different times (2012, 2014, and 2015).
Some employees incurred transit expenses that were over the limits before the change in the law but at or below the limit after the changes in the law. Employers have provided or are considering providing each such employee a lump sum cash payment in an amount equal to the monthly amount they can substantiate that they spent on transit passes in one or more of 2012, 2014, and 2015 in excess of the pre-amendment statutory limit, but not to exceed the monthly post-amendment statutory limit. The employers have asked the IRS whether such a payment in includible in the employees’ income as wages and subject to employment taxes or excludible as a fringe benefits under Code Sec. 132(f).
The Chief Counsel ruled that if transit passes are readily available in the employer’s area, the Code does not provide an income or employment tax exclusion for transit benefits paid to employees in cash. We understand that in many cases transit passes are readily available in the areas about which employers are asking questions. In such cases, any distribution of cash to employees would be wages to the employee and subject to federal income tax withholding and reporting, including distributions provided due to the retroactive increase in the maximum amount of the excludable transit benefit. In addition, if transit passes were not readily available in an area such that employers were permitted to provide transit benefits in the form of cash reimbursements, such benefits must be provided under a bona fide reimbursement arrangement for expenses actually incurred and substantiated by employees. (IRS Office of Chief Counsel, Memorandum, PRESP-138531-15, PMTA-2016-01, February 24, 2016.)
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