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IRS: cash reimbursements to reflect retroactive transit benefit increase may be taxable

Program Manager Technical Advice 2016-001

In Program Manager Technical Advice (PMTA), IRS has concluded that: a) where transit passes are readily available, cash payments from employers to employees, to reflect retroactive legislation that increased the amount of the exemption for qualified transportation fringe benefits, are taxable compensation; and b) an employee’s maximum excludible qualified transportation fringe benefits for a year are limited by the statutory monthly excludible amount, with the result that, whether or not transit passes are readily available, employers cannot provide retroactive benefits that exceed that annual limit.

Background. Code Sec. 132(a)(5) provides that any fringe benefit that is a qualified transportation fringe is excluded from gross income.Code Sec. 132(f)(1)(B) provides that the term “qualified transportation fringe” includes any transit pass.

Under Code Sec. 132(f)(5)(A), a “transit pass” is defined as any pass, token, farecard, voucher, or similar item that entitles a person to transportation on mass transit facilities whether or not publicly owned.

Code Sec. 132(f)(2) provides a monthly limit for the amount of the fringe benefit provided by an employer which may be excluded from an employee’s gross income under Code Sec. 132(a)(5). Prior to Jan. 1, 2016, the base monthly limit in Code Sec. 132(f)(2)(A) for the aggregate of transportation in a commuter highway vehicle and transit passes was $100. This base monthly limit is adjusted annually for inflation under Code Sec. 132(f)(6). Accordingly, after adjustment for inflation, the “pre-amendment statutory limit” of the fringe benefit which could be excluded from gross income and wages for 2012 was $125 per month for the aggregate of transportation in a commuter highway vehicle and transit passes. After adjustment for inflation, the pre-amendment statutory limit of the fringe benefit which could be excluded from gross income and wages for 2014 and 2015 was $130 per month for the aggregate of transportation in a commuter highway vehicle and transit passes.

For calendar years 2012, 2014 and 2015, Congress retroactively amended Code Sec. 132(f) to raise the amount of a transit pass subsidy that could be excluded from an employee’s monthly gross income (“post-amendment statutory limit”).

Reg. § 1.132-9, Q&A 8(a) provides that an employee must include in gross income the amount by which the fair market value of the benefit exceeds the sum of the amount, if any, paid by the employee and any amount excluded from gross income under Code Sec. 132(a)(5).

Under Reg. § 1.132-9, Q&A 22(c), qualified transportation fringes exceeding the applicable monthly limit are wages for purposes of FICA, FUTA and federal income tax withholding and are reported on the employee’s Form W-2, Wage and Tax Statement.

Code Sec. 132(f)(3) provides that a qualified transportation fringe includes a cash reimbursement by an employer to an employee for transit benefits only if a voucher or similar item that may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee. Where vouchers are not readily available, employers that make cash reimbursements must establish a bona fide reimbursement arrangement to establish that their employees have, in fact, incurred expenses for transportation in a commuter highway vehicle, transit passes, or qualified parking. (Reg. § 1.132-9, Q&A 16(c))

A voucher or similar item is readily available for direct distribution by an employer to employees if and only if the employer can obtain it from a voucher provider that does not impose fare media charges greater than 1% of the average annual value of the voucher for a transit system and does not impose other restrictions causing the voucher not to be considered readily available. (Reg. § 1.132-9, Q&A 16(b)(4))

The Joint Committee on Taxation (JCT) reports regarding the three retroactive increases contain similar language with regard to cash reimbursements to employees to reflect the retroactive legislation. For example, with respect to the 2012 amendment, the JCT’s General Explanation of Tax Legislation Enacted in the 112th Congress provides: “In order for the extension to be effective retroactive to January 1, 2012, expenses incurred during 2012 by an employee for employer-provided vanpool and transit benefits may be reimbursed (under a bona fide reimbursement arrangement) by employers on a tax-free basis to the extent they exceed $125 per month and are less than $240 per month. Congress intends that the rule that an employer reimbursement is excludible only if vouchers are not available to provide the benefit shall continue to apply, except in the case of reimbursements for vanpool or transit benefits between $125 and $240 for months during 2012. Further, Congress intends that reimbursements for expenses incurred for months during 2012 may be made in addition to the provision of benefits or reimbursements of up to $245 per month for expenses incurred during 2013.”

Facts. Employers indicated that they provided employees with a transit pass which complied with the requirements of Code Sec. 132(f). The amount of the transit pass did not exceed the statutory limit at the time the transit pass was provided (“pre-amendment statutory limit”). Employers indicated that some of their employees incurred transit expenses in excess of the pre-amendment statutory limit in one or more of the calendar years 2012, 2014 and 2015. Employers provided, or are considering providing, in 2016, each such employee a lump sum cash payment in an amount equal to the monthly amount they can substantiate that they spent on transit passes in one or more of 2012, 2014 and 2015 in excess of the pre-amendment statutory limit, but not to exceed the monthly post-amendment statutory limit.

Employers inquired whether such a payment in includible in the employees’ income as wages or excludible under Code Sec. 132(f).

IRS says amounts in question are taxable. In the PMTA, IRS concluded that:

(1) If transit passes are readily available in the employer’s area, the Code does not provide an income or employment tax exclusion for transit benefits paid to employees in cash. In such cases, any distribution of cash to employees would be wages to the employee and subject to federal income tax withholding and reporting, including distributions provided due to the retroactive increase in the maximum amount of the excludable transit benefit.

(2) If transit passes were not readily available in an area such that employers were permitted to provide transit benefits in the form of cash reimbursements, such benefits must be provided under a bona fide reimbursement arrangement for expenses actually incurred and substantiated by employees, as described in Reg. § 1.132-9, Q&A 16(c).

(3) Code Sec. 132(f)(2) limits the amount that can be provided by an employer to an employee per month on a tax-free basis. That amount is $255 for 2016. Any amount an employer provides in excess of that statutory monthly limit is not excludible under Code Sec. 132(a)(5), even if provided due to the increase in the monthly excludable amount for 2012, 2014 or 2015. Such excess amounts in 2016 would be wages to the employee and subject to employment tax withholding and reporting.

RIA observation: The rule at (3) above applies regardless of whether transit passes are readily available in the employer’s area.

As to the JCT reports, IRS said that rules of statutory construction provide that the relevant inquiry is the language of the statute. Citing several Supreme Court cases, including Exxon Mobil Corporation v. Allapattah Services, Inc., (2005) 125 S Ct 2611, IRS said that the authoritative statement is the statutory text, not the legislative history or any other extrinsic material. Extrinsic materials have a role in statutory interpretation only to the extent they shed a reliable light on the enacting Legislature’s understanding of otherwise ambiguous terms. “We do not resort to legislative history to cloud a statutory text that is clear.”

IRS said that, in this case, the statutory text is clear. Congress changed the amount of the monthly statutory limit but did not change any other requirements of Code Sec. 132. There is no need to look to the legislative history. In addition, JCT reports, while they may be of value, are not considered to be legislative history.

References: For qualified transportation fringe benefits, see FTC 2d/FIN ¶  H-2217; United States Tax Reporter ¶  1324.08; TaxDesk ¶  134,591; TG ¶  7224  et seq.