IRS Program Manager Technical Advice Memorandum 2016-1 (Feb. 24, 2016)
Available at https://www.irs.gov/pub/lanoa/PMTA-2016-01.pdf
The IRS has released a technical advice memorandum that explains why retroactive cash reimbursements paid to employees for certain transit expenses incurred in 2012, 2014, or 2015 might be taxable. The memo addresses employers that provided transit passes to their employees but limited the value of those passes to the lower combined limit for transit and vanpooling benefits that applied until Congress retroactively increased the limit for those years to equal the limit for qualified parking. (That equivalence is often referred to as “transit parity.” Transit parity was adopted prospectively for 2013.) The employers asked whether they could provide lump-sum cash reimbursements for substantiated transit expenses incurred during those years up to the difference between the original lower limit and the retroactively increased limit. (The higher limit was made permanent by the Consolidated Appropriations Act, 2016 (see our Checkpoint article).) Specifically, those employers asked whether they could provide nontaxable benefits without regard to the “readily available” test, which precludes cash reimbursements for transit pass expenses if vouchers are readily available for distribution in kind to employees.
The employers pointed to reports of the Joint Committee on Taxation suggesting that Congress intended to waive the readily available test, but the memo concludes that those reports are technically not legislative history and in any event are not relevant because the statute is unambiguous. Although the legislation retroactively increased the combined limit, it did not change any other requirements of Code § 132. As a result, retroactive cash reimbursements cannot be made on a nontaxable basis for transit expenses in those years if vouchers were readily available. If vouchers were not readily available, nontaxable cash reimbursements can only be made under a “bona fide reimbursement arrangement” for expenses actually incurred and substantiated. The memo also indicates that reimbursements in excess of the applicable statutory monthly limit are not excludable.
EBIA Comment: This memo clearly rejects the notion that Congress loosened any other aspect of the transit reimbursement rules when it retroactively restored transit parity. Those other rules—including the readily available test, the substantiation requirements that apply to bona fide reimbursement arrangements, and the dollar limits on reimbursable expenses and compensation reductions—will effectively preclude many employers from making retroactive cash reimbursements. In light of the memo, employers that have already made additional reimbursements and treated those reimbursements as tax-free should review the reimbursements to determine whether all the applicable requirements were met. If not, the reimbursements’ tax treatment may need to be corrected. For more information, see EBIA’s Fringe Benefits manual at Sections XX.E (“Transit Passes”) and XX.Q (“Expense Substantiation and Other Requirements for Cash Reimbursements”).
Contributing Editors: EBIA Staff.