IRS issues guidance on transportation fringe benefits

The IRS has provided guidance for employers who wish to provide transit pass benefits to employees through the use of a smartcard (a plastic card with an imbedded memory chip). The guidance modifies and supersedes previously released guidance (see related stories in Payroll Management Guide Report Letters 2126, dated December 22, 2009; 1966, dated November 28, 2006; 2011 dated October 9, 2007; and 2059 dated September 9, 2008) regarding the use of transit cards and debit cards, and when an employer may use a bona fide cash reimbursement arrangement to provide a qualified transportation fringe benefit.
The value of transit pass benefits provided to employees through the use of a smartcard is a qualified transportation fringe benefit if the card is usable only as fare media or if the card may only be used at points of sale where nothing other than fare media for a transit system is sold. Rev. Rul. 2006-57 provided that debit cards that can be used at vendors that only sell transit fare media may qualify as transit passes, but not if the cards could be used at vendors that sell other items (such as grocery stores that sell transit passes). The ruling noted that the IRS intended to issue guidance on terminal-restricted debit cards which were generally unavailable at the time. The IRS stated that until guidance was issued, employers could reimburse employees with cash for transit passes when the only available voucher or similar item was a terminal-restricted debit card.

The new ruling allows terminal-restricted debit cards that can be used at vendors that sell items in addition to transit fare media as long as the card issuer adds modifications so that the card only works for the purchase of transit fare media. Media bought online with such a card may include a delivery charge that would qualify for the exclusion. The ruling also provides that a transit company smart card that includes separate accounts for transit, for non-transit (such as parking), and for both can qualify if the employer buys the card and allocates all of the funds to the transit account, but not if the employee buys the transit card with a debit card provided by the employer.

Finally, the ruling rescinds the IRS’ temporary accommodation for employers without access to terminal-restricted cards. Effective December 31, 2015, employers may no longer provide qualified transportation fringe benefits under a bona fide cash reimbursement arrangement in cases in which a terminal-restricted debit card is the only voucher or similar item available for direct distribution by the employer to employees that may be exchanged for a transit pass. If the employer is permitted to provide qualified transportation fringes in the form of cash reimbursement for transit passes, certain substantiation requirements must be met: the arrangement cannot provide for advances rather than reimbursement, and cannot rely on employee certifications provided before the expense is incurred. Rev. Rul. 2006-57, 2006-2 CB 911, is modified and superceded. (IRS Rev. Rul. 2014-32, IRB 2014-50, December 8, 2014.)

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