Qualified Transportation Plan Cannot Make Nontaxable Cash Reimbursements for Transit Expenses When an Electronic Payment Card Malfunctions

The IRS Chief Counsel’s office has released a memorandum that considers when an employer can provide nontaxable transit benefits in the form of cash reimbursements despite the general availability of an electronic payment card. As background, qualified transportation plans can provide nontaxable cash reimbursement for transit passes only if a voucher or similar item that is accepted as fare media or can be exchanged for fare media is not “readily available” for direct distribution to employees. Certain electronic payment cards qualify as vouchers, including smartcards, terminal-restricted debit cards, and cards with merchant category code (MCC) restrictions that block all purchases other than fare media. Vouchers are not treated as readily available if they impose certain financial restrictions (e.g., if average fare media charges exceed 1% of the average annual value of the vouchers) or nonfinancial restrictions (e.g., unreasonable advance purchase, purchase quantity, or denomination limitations).

The memo observes that a provider’s imposition of timing delays on the purchase or distribution of transit passes (or electronic cards used as passes) may be a nonfinancial restriction that prevents the passes from being readily available. This could happen if the provider allows new participants to be enrolled only on a certain day of the month or requires a minimum time to prepare electronic payment cards. Under such circumstances, an employer may provide nontaxable qualified transportation fringe benefits in the form of cash reimbursements. Likewise, if nonfunctional cards are provided to the employer and must be replaced, they may be considered not readily available, allowing cash reimbursements to be treated as nontaxable qualified transportation fringe benefits. Once a functioning payment card has been provided, however, the transportation benefit is considered provided. Post-distribution card malfunctions, or failures in the system reading the card, do not prevent the card from being readily available for distribution within the meaning of the statute. Consequently, cash reimbursements for expenses incurred due to malfunctioning cards or card systems are not qualified transportation fringe benefits, and those reimbursements will be fully taxable.

EBIA Comment: This appears to be the first time that IRS guidance has considered whether employers can provide nontaxable reimbursements under a qualified transportation fringe benefit plan when electronic payment cards or card systems malfunction. The IRS has drawn a bright line: If functioning cards were distributed, an employee’s later inability to use the card will not permit nontaxable cash reimbursements. In that situation, the memo observes, it should be the transit system’s responsibility to honor the card and address any malfunctions. For more information, see EBIA’s Fringe Benefits manual at Sections XX.E (“Transit Passes”) and XX.Q.12 (“Can Electronic Payment Cards Be Used to Expedite Reimbursement of Transit Expenses?”).

Contributing Editors: EBIA Staff.