In a Chief Counsel Advice, the IRS said that an employer’s cash reimbursement of an employee’s purchase of transit fare (because her employer-provided transit debit card did not work) was not a qualified transportation fringe benefit because the employer had already provided the debit card and hence it was readily available.
Gross income does not include qualified transportation fringe benefits. (Code Sec. 132(a)(5))
A qualified transportation fringe benefit includes a transit pass provided by an employer to an employee. (Code Sec. 132(f)(1)(B))
A qualified transportation fringe benefit also includes cash reimbursement for transit passes made under a bona fide reimbursement arrangement, but, in accordance with Code Sec. 132(f)(3), only if no voucher or similar item that may be exchanged only for a transit pass is readily available for direct distribution by the employer to employees. (Reg. § 1.132-9(b) Q/A-16(b)(1))
An employer provides transit passes, in the form of debit cards, to its employees that qualify as qualified transportation fringe benefits.
An employee tried to use the debit card to purchase fare on public transportation, but the card did not work. The employee paid in cash instead.
If the employer reimburses the employee for the cash she used, has the employee received a qualified transportation fringe benefit?
The Chief Counsel said no, the cash reimbursement would not be a qualified transportation fringe benefit because the debit card was readily available.
The Chief Counsel said that when an employer provides a debit card to the employee, the qualified transportation fringe benefit is considered provided (and hence readily available). Accordingly, malfunctions in the card (e.g., chip stops working) or malfunctions in the system reading the card (e.g., card reader goes down during commute) do not mean that the transit pass was not readily available to the employer for distribution within the meaning of Code Sec. 132(f)(3).
The Chief Counsel continued to say that one would expect in these circumstances that the employee would contact the transportation provider to have the malfunction remedied or to provide the transportation. Since the employee has a valid debit card, it would be the transportation system’s responsibility to honor the card and address possible technical malfunctions. The card need only entitle the employee to the benefit, and there is no requirement in the Code and its regulations that the employee ultimately avail him or herself of the transit benefit or that the benefit be available at any time for the employee’s use. For example, if an employee missed a van pool and was not able to recuperate the lost trip, the voucher for the van pool rides would still have been provided.
Thus, cash reimbursements for expenses incurred in the use of transit due to malfunctioning cards or systems are not qualified transportation fringe benefits, and the value of any cash reimbursements provided for such expenses would be included in the employee’s income and is included in wages subject to FICA, FUTA, and income tax withholding.
To continue your research on when vouchers for transit passes are readily available so that cash reimbursements are not qualified transportation fringe benefits, see FTC 2d/FIN ¶H-2212.2; United States Tax Reporter ¶1324.
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