QUESTION: Our company has a qualified transportation plan that allows employees to purchase parking and transit benefits with pre-tax compensation reductions. Because of the COVID-19 pandemic, many of the plan’s participants are now working remotely or have been laid off. How can we help those employees avoid losing amounts they have set aside to purchase transportation benefits?
ANSWER: The Code’s rules for qualified transportation plans offer considerable flexibility for minimizing benefit losses by participants who are no longer commuting, are commuting less frequently, or have changed their method of commuting. Unlike the rules governing health FSAs, the qualified transportation plan rules place few restrictions on compensation reduction election changes. Moreover, unused amounts that were initially set aside for one purpose, e.g., transit benefits, may be used for another qualified transportation benefit offered under the same plan, e.g., parking, if the requirements for that other benefit are met.
Many plans fully incorporate this flexibility. The following steps will help you determine whether you have done what you can under the Code to minimize the pandemic’s effect on your employees’ transportation benefits:
Review your plan. Most plans give participants considerable freedom to stop or right-size their compensation reduction elections. Most also allow participants to carry over unused balances during employment. So, your plan may already give employees the ability to pause or decrease their compensation reductions during a period of temporary remote work, and to carry any unused balances over until they resume commuting. If your plan is less flexible than it could be, consider amending it to make it easier for employees to control their accumulating balances (e.g., by allowing participants to reduce or stop their elections more frequently) and maximize their ability to carry balances forward for later use (e.g., by removing limits on carryovers).
Communicate with employees. Be sure to remind employees who no longer need transportation benefits that they can stop or reduce their compensation reductions. And if employees are accumulating balances you suspect they will never use, consider amending the plan to stop compensation reductions for employees in jobs that have permanently changed to telecommuting positions.
Clarify laid-off employees’ status. Qualified transportation plans cannot reimburse expenses unless they are incurred or paid during employment. You should determine whether employees who have been “laid off” are still participating employees or are former employees who can no longer participate. Most plans allow former employees to be reimbursed for expenses incurred or paid prior to termination, so former employees should be encouraged to submit all pre-termination reimbursable expenses before the end of the plan’s run-out period (i.e., the period after termination during which reimbursement claims may be submitted). You might also lengthen the run-out period, subject to the regulations’ requirement that expenses be substantiated within a “reasonable period of time.”
No refunds. Former employees must forfeit their account balances if not used by the end of the run-out period. Refunds are not permitted.
For more information, see EBIA’s Fringe Benefits manual at Sections XX.O (“Compensation Reduction Elections”), XX.P (“Carryovers Allowed for Current Participants: Former Participants Cannot Have Unused Amounts Refunded”), and XX.Q (“Expense Substantiation and Other Requirements for Cash Reimbursements”).
Contributing Editors: EBIA Staff.