Information Letter 2016-0007 (Mar. 3, 2016)
Available at https://www.irs.gov/pub/irs-wd/16-0007.pdf
In this information letter, the IRS addresses whether an employer can reimburse transit expenses when the transit provider refuses to accept employer-provided debit cards as payment. As background, Code § 132(f) allows employers to provide employees with certain transportation benefits, including transit passes, on a tax-free basis. However, cash reimbursement for transit passes is not allowed if a voucher or similar item that can only be exchanged for a transit pass is “readily available” for distribution to employees. Beginning in 2016, that restriction applies if the voucher is a terminal-restricted debit card—i.e., a debit card that can only be used at transit terminals that sell only fare media (see our Checkpoint article). According to the letter, other types of debit cards may also qualify as vouchers that preclude cash reimbursement of transit expenses if the cards can only be used to purchase fare media. In the situation described in the letter, the employer stopped providing cash reimbursement for bus tickets because it made a debit card available for employees’ transit expenses. One bus company, however, only accepts cash or checks, prompting an employee to ask whether his employer really is prohibited from making cash reimbursements.
In response to the employee’s question, the IRS explains that whether the employer can reimburse employees in cash for their bus tickets depends on the readily available test. The bus company’s unwillingness to accept debit card payments does not, by itself, cause the bus tickets to fail the test. For example, the IRS suggested that the employer could purchase ticket books from the bus company for direct distribution to employees. But if other restrictions make the ticket books not readily available, then the employer would be permitted to provide cash reimbursement.
EBIA Comment: Certain nonfinancial restrictions can cause the readily available test to be failed—e.g., unreasonable advance purchase requirements; unreasonable purchase quantity requirements; and inappropriate denomination requirements. But a requirement that payment be in the form of a check or cash is apparently not sufficient to make vouchers unavailable and allow cash reimbursements. If an employer cannot offer cash reimbursements for a particular transit provider, and more convenient vouchers like debit cards cannot be used, the employer may need to make a difficult decision: deal with the practical challenges of distributing the available vouchers for that provider, or refuse to pay benefits for that provider because the administrative burdens of dealing with the available vouchers outweigh the value of the transit benefit. If the employer takes the latter approach and some transit providers are not covered by plan design, it will be especially important for the employer to identify which transit providers are covered and which are not. For more information, see EBIA’s Fringe Benefits manual at Sections XX.E.5 (“No Cash Reimbursement Unless Special Rules (Such as Readily Available Test) Are Met; Consequently, Some Employers Don’t Offer Transit Passes at All”) and XX.Q.12 (“Can Electronic Payment Cards Be Used to Expedite Claims Processing for Qualified Transportation Plans?”).
Contributing Editors: EBIA Staff.