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Benefits

Qualified Transportation Compensation Reductions That Were Unused Due to COVID-19 Pandemic Cannot Be Refunded

EBIA  

· 5 minute read

EBIA  

· 5 minute read

IRS Information Letter 2024-0004 (Mar. 29, 2024)

 Available at https://www.irs.gov/pub/irs-wd/24-0004.pdf

The IRS has released an information letter responding to an employee’s inquiry about receiving a distribution of unused funds from her employer’s qualified transportation plan due to commuting changes caused by the COVID-19 pandemic. The inquiry incorrectly referred to the plan as a “transportation flexible spending account,” and the letter includes a reminder that qualified transportation fringe benefits are not qualified benefits under a cafeteria plan and are not part of a flexible spending arrangement.

The letter explains that unused compensation reduction amounts under an employer’s qualified transportation plan can be carried over to subsequent periods and used for future qualified transportation fringe benefits offered under the plan, so long as the employee does not receive benefits that exceed the maximum excludable amount in any month. But refunds not based on qualifying commuting activity are not permitted.

EBIA Comment: Compensation reductions set aside for one qualified transportation benefit (e.g., transit) can also be used for a different transportation benefit (e.g., parking) if permitted under the plan and the maximum monthly benefit is not exceeded. However, funds designated as qualified transportation fringe benefits can only be used for qualifying commuting activity and are nonrefundable for any other reason, even where employees no longer need or are ineligible for qualified transportation fringe benefits due to a pandemic event. Because some risk of loss due to changing circumstances is unavoidable, employers should clearly articulate that risk to employees before they make compensation reduction elections. Employers should keep in mind that employees can always revoke a compensation reduction election if they do so before their compensation becomes currently available and before the period for which the benefit was to be provided. For more information, see EBIA’s Fringe Benefits manual at Sections XX.O (“Compensation Reduction Elections”) and XX.P (“Unused Amounts Cannot Be Refunded; Carryovers Allowed for Current Participants”). See also EBIA’s Cafeteria Plans manual at Section X.C (“Benefits That Cannot Be Offered Under a Cafeteria Plan”).

 

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