| T.D. 8933 |
January 17, 2001 |
Qualified Transportation Fringe Benefits
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8933] RIN 1545-
AX33
TITLE: Qualified Transportation Fringe Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
SUMMARY: This document contains final regulations relating to
qualified transportation fringe benefits. These final regulations
provide rules to ensure that transportation benefits provided to
employees are excludable from gross income. These final regulations
reflect changes to the law made by the Energy Policy Act of 1992,
the Taxpayer Relief Act of 1997, and the Transportation Equity Act
for the 21 st Century. These final regulations affect employers that
offer qualified transportation fringes and employees who receive
these benefits.
DATES: Effective Date: These regulations are effective January 11,
2001.
Applicability Date: For dates of applicability, see
§1.132-9(b), Q/A-25.
FOR FURTHER INFORMATION CONTACT: John Richards, (202) 622-6040 (not
a toll-free number).
SUPPLEMENTARY INFORMATION: Paperwork Reduction Act
The collection of information contained in these final
regulations has been reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507) under control number 1545- 1676. Responses
to this collection of information are mandatory to obtain the
benefit described under section 132(f).
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it
displays a valid control number assigned by the Office of Management
and Budget.
The estimated average annual recordkeeping burden per
recordkeeper is 26.5 hours. The estimated annual reporting burden
per respondent is .8 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service , Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC 20224, and to the Office of
Management and Budget , Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to a collection of information must
be retained as long as their contents might become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103. Background
This document contains amendments to 26 CFR part 1 (Income Tax
Regulations). On January 27, 2000, a proposed regulation
(REG-113572-99) relating
to qualified transportation fringes was published in the Federal
Register (65 FR 4388). A public hearing was held on June 1, 2000.
Written or electronic comments responding to the notice of proposed
rulemaking were received. After consideration of all the comments,
the proposed regulations are adopted as amended by this Treasury
decision. The revisions are discussed below. Explanation of
Provisions and Summary of Comments
In general, comments received on the proposed regulations
were favorable and, accordingly, the final regulations retain the
general structure of the proposed regulations, including the
question and answer format and a variety of examples illustrating
the substance of the final regulations. However, commentators made a
number of specific recommendations for modifications and
clarifications of the regulations. In response to these comments,
the final regulations incorporate the modifications and
clarifications described below. A. Whether Vouchers are Readily
Available
Section 132(f)(3) provides that qualified transportation
fringes include cash reimbursement for transit passes "only if a
voucher or similar item which may be exchanged only for a transit
pass is not readily available for direct distribution by the
employer to the employee." Thus, if vouchers are readily available,
the employer must use vouchers and cash reimbursement of a mass
transit expense would not be a qualified transportation fringe.
Most of the comments received addressed the issue of whether
vouchers are "readily available." Commentators representing
employers generally favored rules permitting cash reimbursement.
Commentators representing transit operators and voucher providers
generally favored rules not permitting cash reimbursement. The
following discusses three issues raised by commentators: first,
whether the proposed regulations' 1 percent safe harbor should be
retained; second, whether internal administrative costs should be
considered in applying the 1 percent test; and third, whether other
nonfinancial restrictions should be considered in determining
whether vouchers are readily available.
1. The 1 percent safe harbor
Under Notice 94-3, 1994-1 C.B. 327, and the proposed
regulations, a voucher is readily available if an employer can
obtain it on terms no less favorable than those available to an
individual employee and without incurring a significant
administrative cost. Under the proposed regulations, administrative
costs relate only to fees paid to fare media providers, and the
determination of whether obtaining a voucher would result in a
significant administrative cost is made with respect to each transit
system voucher. The proposed regulations provide a rule under which
administrative costs are treated as significant if the average
monthly administrative costs incurred by the employer for a voucher
(disregarding delivery charges imposed by the fare media provider to
the extent not in excess of $15 per order) are more than 1 percent
of the average monthly value of the vouchers for a system.
Commentators, in particular those representing fare media
providers and transit operators, suggested that the fare media
provider fee percentage causing vouchers to not be readily available
should be raised because many fare media providers charge fees in
excess of the 1 percent limit and, thus, under this test, transit
vouchers would not be considered readily available in some large
metropolitan areas. These commentators assert that the 1 percent
test is therefore contrary to the intent of the statute.
Commentators suggested that the 1 percent test, particularly if
combined with inadequate cash reimbursement substantiation
requirements, may result in taxpayer abuse, with the result that the
benefit might not be used for the purpose for which it is intended,
which is to increase the use of mass transit. In addition,
commentators testified at the public hearing that the mandatory use
of vouchers (with no ability to use cash reimbursement if vouchers
are readily available) would increase the use of vouchers and
promote the development of advanced technologies that minimize the
burden on employers while ensuring that the benefit is used for mass
transit. These new technologies might allow an employer to make
payment directly to the transit operator, who in turn credits fare
to the employee's magnetic media fare card, thus eliminating the
need for employers to incur the expense of distributing vouchers.
Other commentators, in particular groups representing
employers, generally favored the 1 percent test, but suggested that
internal costs be considered in applying the test (discussed below).
These commentators took the position that an increase in the
percentage might affect the market charge for such services. There
was also a concern that a strict voucher-use requirement would
result in fewer employers adopting transit pass programs, thus
frustrating the purpose of section 132(f) to increase the use of
mass transit.
The final regulations retain the 1 percent test. The 1 percent
test, applicable for years beginning after December 31, 2003, is
appropriate in light of the rule (discussed below) that only voucher
provider fees are considered in .Ltermining availability. It is
intended that the delayed application of this rule would provide
sufficient time for those affected by this rule to modify their
systems and procedures appropriately. The 1 percent threshold,
coupled with the exclusion of internal administrative costs from the
readily available determination, represents a balanced approach that
will promote the growth of voucher programs in most transportation
areas. In addition, raising the percentage threshold could curtail
the growth in transit benefit programs, which would be contrary to
the goal of increasing the use of mass transit. Finally, in cases
where cash reimbursement is allowed, adequate substantiation
requirements will ensure that transit pass benefits will actually go
toward mass .Lansportation usage. In this regard, the proposed
regulations provide that employers must implement reasonable
procedures to ensure that an amount equal to the reimbursement was
incurred for transit passes. For example, the final regulations
clarify that in circumstances when employee certification is a
reasonable reimbursement procedure, it must occur after the expense
is incurred.
The final regulations also clarify the application of the 1
percent rule if multiple vouchers for a transit system are available
for distribution by an employer to employees, and if multiple
transit system vouchers are required in an area to meet the transit
needs of an employer's employees. The final regulations provide that
if multiple transit system vouchers are available for direct
distribution to employees, the employer must consider the lowest
cost voucher for purposes of determining whether the voucher
provider fees cause vouchers to not be readily available. However,
if multiple vouchers are required in an area to meet the transit
needs of the individual employees in that area, the employer has the
option of averaging the costs applied to vouchers from each system
for purposes of determining whether the voucher provider fees cause
vouchers to not be readily available. 2. Internal administrative
costs Several commentators representing employers recommended that,
in addition to fare media provider fees, internal administrative
costs, especially security and distribution costs, should be
considered in determining whether vouchers are readily available.
These commentators noted that administrative costs are increased
when an employer must maintain both a voucher system and a
reimbursement system to provide qualified transportation fringes.
For example, the employer may maintain a cash reimbursement system
for transportation in a commuter highway vehicle and qualified
parking, and also maintain a voucher system for transit passes. In
addition, several commentators suggested that the increased costs
and administrative burden for employers that maintain offices in
multiple cities should also be considered in determining whether
vouchers are readily available.
The final regulations retain the test considering only fees
paid to voucher providers in .Ltermining availability based on a
plain reading of the terms of the statute. The language "readily
available for direct distribution by the employer to the employee"
under section 132(f)(3) in its plain, ordinary sense means that
vouchers are easily obtainable for direct distribution to the
employer's employees. The determination of availability bears no
relationship with costs that may be incurred after vouchers have
been obtained. The service fees charged by voucher providers and
delivery costs can reasonably be viewed as affecting whether
vouchers are easily obtainable; an employer's internal costs of
subsequently administering a voucher program would not. Thus, based
upon the plain language of section 132(f), internal administrative
costs do not affect whether vouchers are readily available.
Moreover, the test considering only voucher provider fees is a
comparatively simple bright line test. A test that depends on the
employer's internal administrative costs would necessarily be
complex, requiring complex rules that would be difficult for
employers to apply.
3. Other nonfinancial restrictions
Commentators representing employers suggested that
nonfinancial factors should be considered in determining whether
vouchers are readily available. They suggested that factors such as
whether there are reasonable advance purchase and minimum purchase
requirements, and whether vouchers can be purchased in appropriate
denominations, should be considered in determining availability. The
final regulations adopt this suggestion because nonfinancial
restrictions would reasonably affect whether vouchers are available
for distribution by an employer to an employee.
The final regulations provide guidance on the types of
nonfinancial restrictions that cause vouchers to not be readily
available. The final regulations provide that certain nonfinancial
restrictions, such as a voucher provider not making vouchers
available for purchase at reasonable intervals or failing to provide
the vouchers within a reasonable period after receiving payment for
the voucher, cause vouchers to not be readily available. In
addition, if a voucher provider does not provide vouchers in
reasonably appropriate quantities, or in reasonably appropriate
denominations, vouchers may not be readily available.
When and as the standards in these final regulations go into
effect, they will supercede the current law standards in Notice
94-3. B. Advance Transit Passes
Commentators suggested that the administrability of transit
pass programs would be improved if vouchers were permitted to be
distributed in advance for more than one month. The final
regulations adopt this suggestion.
In October of this year, the IRS issued Announcement 2000-78
(2000-43 I.R.B. 428) to notify taxpayers that, when finalized, the
regulations will clarify that transit passes may be distributed in
advance for more than one month (such as for a calendar quarter) by
taking into account the monthly limits for all months for which the
transit passes are distributed. The announcement further provides,
however, that if an employee receives advance transit passes, and
the employee's employment terminates before the beginning of the
last month of the period for which the transit passes were provided,
the employer must include in the employee's wages, for income and
for employment tax purposes (FICA, FUTA, and income tax
withholding), the value of the passes provided for those month(s)
beginning after the employee's employment terminates to the extent
the employer does not recover those transit passes or the value of
those passes. The announcement provides that pending the issuance of
these final regulations, employers may rely on the announcement.
The final regulations differ from the announcement in one
respect. In any case in which transit passes are provided in advance
for a period of no more than three months (such as for a calendar
quarter), but the recipient ceases to be an employee before the
beginning of the last month in that period, the final regulations
provide that the value of a transit pass provided in advance for a
month is excluded from wages for employment tax (FICA, FUTA, and
income tax withholding) purposes (but not for income tax purposes)
unless at the time the transit passes were distributed there was an
established termination date that was before the beginning of the
last month of that period and the employee does in fact terminate
employment before the beginning of the last month of that period.
C. Qualified Parking
The final regulations address whether reimbursement paid to an
employee for parking at a work location away from the employee's
permanent work location is excludable from wages for income and
employment tax purposes under section 132(f). Section 132(f)(5)(C)
defines qualified parking, in part, as "parking provided to an
employee on or near the business premises of the employer . . . ."
The final regulations provide that qualified parking includes
parking on or near a work location at which the employee performs
services for the employer. However, qualified parking does not
include reimbursement for parking that is otherwise excludable from
gross income as a reimbursement treated as paid under an accountable
plan under §1.62-2 of the Income Tax Regulations, or parking
provided in kind to an employee that is excludable from the
employee's gross income as a working condition fringe under section
132(a)(3). Thus, if the exclusion at §1.62-2 or section 132(a)
(3) is available (even if not reimbursed by the employer), then
section 132(f) does not apply.
Whether a reimbursement for local transportation expenses,
including parking at a work location away from the employee's
permanent work location, is excludable from the employee's gross
income under §1.62-2, or whether parking provided in kind to an
employee is excludable from the employee's gross income under
section 132(a)(3), is determined based upon whether the parking
expenses would be deductible if paid or incurred by the employee
under section 162(a) as an expense incurred in the employee's trade
or business of being an employee for the employer.
§§1.62-2(d);
1.132-5(a)(2). Revenue Ruling 99-7 (1999-1 C.B. 361) addresses under
what circumstances daily transportation expenses, including parking,
incurred by a taxpayer in going between the taxpayer's residence and
a work location are deductible by the taxpayer under section 162(a).
The final regulations provide the minimum requirements to ensure
that transportation benefits are qualified transportation fringes
under section 132(f). An employer may have a transit benefit program
that is more restrictive than a program meeting the minimum
requirements under the regulations. In addition, these regulations
do not affect the application of authorities outside the Internal
Revenue Code which may restrict a transportation benefit program.
Federal Government agencies, for example, may be required by other
federal law to implement restrictions beyond those required under
these regulations. D. Applicability Date The regulations are
generally applicable for taxable years beginning after December 31,
2001. However, in order to provide a transition period for those
affected by the 1 percent rule (described under "The 1 percent safe
harbor" in this preamble), that rule is applicable for taxable years
beginning after December 31, 2003. Effect on Other Documents
The following document is obsolete as of January 11, 2001:
Announcement 2000-78 (2000-43 I.R.B. 428).
The following document is modified as of the date these regulations
become applicable (see Q/A-25): Notice 94-3 (1994-1 C.B. 327).
Special Analyses
It has been determined that this Treasury Decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. A final
regulatory flexibility analysis has been prepared for the collection
of information in this Treasury decision under 5 U.S.C. 604. A
summary of the analysis is set forth in this preamble under the
heading "Summary of Final Regulatory Flexibility Analysis." Summary
of Final Regulatory Flexibility Analysis
This analysis is required under the Regulatory Flexibility
Act (5 U.S.C. chapter 6). The collection of information under this
rule is based upon the requirements under section 132(f). We
estimate that approximately 265,000 employers that provide qualified
transportation fringes to their employees will be affected by the
recordkeeping requirements of this rule. None of the comments
received in response to the notice of proposed rulemaking
specifically addressed the initial regulatory flexibility analysis.
Section 132(f)(3) provides that qualified transportation
fringes may be provided in the form of cash reimbursement. The
legislative history indicates that an employer providing cash
reimbursement to the employer's employees for qualified
transportation fringes must establish a bona fide reimbursement
arrangement. As a condition to providing cash reimbursement for
qualified transportation fringes, this rule provides that employers
must receive substantiation from employees. The objective of this
rule is to ensure that reimbursements are made for qualified
transportation fringes.
Whether an arrangement constitutes a bona fide reimbursement
arrangement varies depending on the facts and circumstances,
including the method or methods of payment utilized within a mass
transit system. An employee certification in either written or
electronic form may be sufficient depending upon the facts and
circumstances. For example, if receipts are not provided in the
ordinary course of business, such as with respect to metered parking
or used transit passes that cannot be returned to the user, an
employee certification that expenses have been incurred constitutes
a reasonable reimbursement procedure. A certification that expenses
will be incurred in the future, by itself, is not a reasonable
reimbursement procedure. There are no particular professional skills
required to maintain these records.
In addition, section 132(f)(4) provides that an employee may
choose between cash compensation and qualified transportation
fringes. This rule provides that an employer may allow an employee
the choice to receive either a fixed amount of cash compensation at
a specified future date or a fixed amount of qualified
transportation fringes to be provided for a specified future period
(such as qualified parking to be used during a future calendar
month). This rule provides that employers must keep records with
respect to employee compensation reduction elections. An employee's
election must be in writing or some other permanent and verifiable
form, and include the date of the election, the amount of
compensation to be reduced, and the period for which the qualified
transportation fringes will be provided. The objective of this rule
is to ensure against recharacterization of taxable compensation
after it has been paid to the employee. There are no particular
professional skills required to maintain these records.
A less burdensome alternative for small organizations would be
to exempt those entities from the recordkeeping requirements under
this rule. However, it would be inconsistent with the statutory
provisions and legislative history to exempt those entities from the
recordkeeping requirements imposed under this rule.
This rule provides several options which avoid more burdensome
recordkeeping requirements for small entities. This rule provides
that (1) there are no substantiation requirements if the employer
distributes transit passes in kind; (2) a compensation reduction
election may be made electronically; (3) an election to reduce
compensation may be automatically renewed; (4) an employer may
provide for deemed compensation reduction elections under its
qualified transportation fringe benefit plan; and (5) a requirement
that a voucher be distributed in-kind by the employer is satisfied
if the voucher is distributed by the employer or by another person
on behalf of the employer (for example, if a transit operator
credits amounts to the employee's fare card as a result of payments
made to the operator by the employer).
Drafting Information
The principal author of these regulations is John Richards,
Office of the Assistant Chief Counsel (Exempt
Organizations/Employment Tax/Government Entities). However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects
26 CFR Part 1 Income taxes, Employment taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements. Adoption of
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to
read in part as follows: Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.132-0 is amended by:
1. Adding an entry for §1.132-5(p)(4)
2. Adding entries for §1.132-9. The additions read as
follows:
§1.132-0 Outline of regulations under section 132.
* * * * *
§1.132-5 Working condition fringes.
* * * * *
(p) * * *
(4) Dates of applicability.
* * * * *
§1.132-9 Qualified transportation fringes.
(a) Table of contents.
(b) Questions and answers.
Par. 3. Section 1.132-5 is amended by adding paragraph (p)(4)
to read as follows:
§1.132-5 Working condition fringes.
* * * * *
(p) * * *
(4) Dates of applicability. This paragraph (p) applies to
benefits provided before January 1, 1993. For benefits provided
after December 31, 1992, see §1.132-9.
* * * * *
Par. 4. Section 1.132-9 is added to read as follows:
§1.132-9 Qualified transportation fringes.
(a) Table of contents. This section contains a list of the
questions and answers in §1.132-9.
(1) General rules.
Q-1. What is a qualified transportation fringe?
Q-2. What is transportation in a commuter highway vehicle?
Q-3. What are transit passes?
Q-4. What is qualified parking?
Q-5. May qualified transportation fringes be provided to individuals
who are not employees?
Q-6. Must a qualified transportation fringe benefit plan be in
writing?
(2) Dollar limitations.
Q-7. Is there a limit on the value of qualified transportation
fringes that may be excluded from an employee's gross income?
Q-8. What amount is includible in an employee's wages for income and
employment tax purposes if the value of the qualified transportation
fringe exceeds the applicable statutory monthly limit?
Q-9. Are excludable qualified transportation fringes calculated on a
monthly basis?
Q-10. May an employee receive qualified transportation fringes from
more than one employer?
(3) Compensation reduction.
Q-11. May qualified transportation fringes be provided to employees
pursuant to a compensation reduction agreement?
Q-12. What is a compensation reduction election for purposes of
section 132(f)?
Q-13. Is there a limit to the amount of the compensation reduction?
Q-14. When must the employee have made a compensation reduction
election and under what circumstances may the amount be paid in cash
to the employee?
Q-15. May an employee whose qualified transportation fringe costs
are less than the employee's compensation reduction carry over this
excess amount to subsequent periods?
(4) Expense reimbursements.
Q-16. How does section 132(f) apply to expense reimbursements?
Q-17. May an employer provide nontaxable cash reimbursement under
section 132(f) for periods longer than one month?
Q-18. What are the substantiation requirements if an employer
distributes transit passes?
Q-19. May an employer choose to impose substantiation requirements
in addition to those described in this regulation?
(5) Special rules for parking and vanpools.
Q-20. How is the value of parking determined?
Q-21. How do the qualified transportation fringe rules apply to van
pools?
(6) Reporting and employment taxes.
Q-22. What are the reporting and employment tax requirements for
qualified transportation fringes?
(7) Interaction with other fringe benefits.
Q-23. How does section 132(f) interact with other fringe benefit
rules?
(8) Application to individuals who are not employees.
Q-24. May qualified transportation fringes be provided to
individuals who are partners, 2-percent shareholders of S-
corporations, or independent contractors?
(9) Effective date.
Q-25. What is the effective date of this section?
(b) Questions and answers.
Q-1. What is a qualified transportation fringe?
A-1. (a) The following benefits are qualified transportation
fringe benefits:
(1) Transportation in a commuter highway vehicle.
(2) Transit passes.
(3) Qualified parking.
(b) An employer may simultaneously provide an employee with any
one or more of these three benefits.
Q-2. What is transportation in a commuter highway vehicle?
A-2. Transportation in a commuter highway vehicle is
transportation provided by an employer to an employee in connection
with travel between the employee's residence and place of
employment. A commuter highway vehicle is a highway vehicle with a
seating capacity of at least 6 adults (excluding the driver) and
with respect to which at least 80 percent of the vehicle's mileage
for a year is reasonably expected to be--
(a) For transporting employees in connection with travel between
their residences and their place of employment; and
(b) On trips during which the number of employees transported for
commuting is at least one-half of the adult seating capacity of the
vehicle (excluding the driver).
Q-3. What are transit passes?
A-3. A transit pass is any pass, token, farecard, voucher, or
similar item (including an item exchangeable for fare media) that
entitles a person to transportation--
(a) On mass transit facilities (whether or not publicly owned); or
(b) Provided by any person in the business of transporting persons
for compensation or hire in a highway vehicle with a seating
capacity of at least 6 adults (excluding the driver).
Q-4. What is qualified parking?
A-4. (a) Qualified parking is parking provided to an employee by
an employer--
(1) On or near the employer's business premises; or
(2) At a location from which the employee commutes to work
(including commuting by carpool, commuter highway vehicle, mass
transit facilities, or .Lansportation provided by any person in the
business of transporting persons for compensation or hire).
(b) For purposes of section 132(f), parking on or near the
employer's business premises includes parking on or near a work
location at which the employee provides services for the employer.
However, qualified parking does not include--
(1) The value of parking provided to an employee that is
excludable from gross income under section 132(a)(3) (as a working
condition fringe), or
(2) Reimbursement paid to an employee for parking costs that is
excludable from gross income as an amount treated as paid under an
accountable plan. See §1.62-2.
(c) However, parking on or near property used by the employee for
residential purposes is not qualified parking.
(d) Parking is provided by an employer if--
(1) The parking is on property that the employer owns or leases;
(2) The employer pays for the parking; or
(3) The employer reimburses the employee for parking expenses (see
Q/A-16 of this section for rules relating to cash reimbursements).
Q-5. May qualified transportation fringes be provided to
individuals who are not employees?
A-5. An employer may provide qualified transportation fringes only
to individuals who are currently employees of the employer at the
time the qualified transportation fringe is provided. The term
employee for purposes of qualified transportation fringes is defined
in §1.132-1(b)(2)(i). This term includes only common law
employees and other statutory employees, such as officers of
corporations. See Q/A-24 of this section for rules regarding
partners, 2-percent shareholders, and independent contractors.
Q-6. Must a qualified transportation fringe benefit plan be in
writing?
A-6. No. Section 132(f) does not require that a qualified
transportation fringe benefit plan be in writing.
Q-7. Is there a limit on the value of qualified transportation
fringes that may be excluded from an employee's gross income?
A-7. (a) Transportation in a commuter highway vehicle and transit
passes. Before January 1, 2002, up to $65 per month is excludable
from the gross income of an employee for transportation in a
commuter highway vehicle and transit passes provided by an employer.
On January 1, 2002, this amount is increased to $100 per month.
(b) Parking. Up to $175 per month is excludable from the gross
income of an employee for qualified parking.
(c) Combination. An employer may provide qualified parking
benefits in addition to transportation in a commuter highway vehicle
and transit passes.
(d) Cost-of-living adjustments. The amounts in paragraphs (a) and
(b) of this Q/A-7 are adjusted annually, beginning with 2000, to
reflect cost-of-living. The adjusted figures are announced by the
Service before the beginning of the year.
Q-8. What amount is includible in an employee's wages for income
and employment tax purposes if the value of the qualified
transportation fringe exceeds the applicable statutory monthly
limit?
A-8. (a) Generally, 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 section 132(a)(5). Thus, assuming no other
statutory exclusion applies, if an employer provides an employee
with a qualified transportation fringe that exceeds the applicable
statutory monthly limit and the employee does not make any payment,
the value of the benefits provided in excess of the applicable
statutory monthly limit is included in the employee's wages for
income and employment tax purposes. See §1.61-21(b)(1).
(b) The following examples illustrate the principles of this
Q/A-8: Example 1.
(i) For each month in a year in which the statutory monthly transit
pass limit is $100 (i.e., a year after 2001), Employer M provides a
transit pass valued at $110 to Employee D, who does not pay any
amount to Employer M for the transit pass.
(ii) In this Example 1, because the value of the monthly transit
pass exceeds the statutory monthly limit by $10, $120 ($110 - $100,
times 12 months) must be included in D's wages for income and
employment tax purposes for the year with respect to the transit
passes. Example 2.
(i) For each month in a year in which the statutory monthly
qualified parking limit is $175, Employer M provides qualified
parking valued at $195 to Employee E, who does not pay any amount to
M for the parking.
(ii) In this Example 2, because the fair market value of the
qualified parking exceeds the statutory monthly limit by $20, $240
($195 - $175, times 12 months) must be included in Employee E's
wages for income and employment tax purposes for the year with
respect to the qualified parking.
Example 3.
(i) For each month in a year in which the statutory monthly
qualified parking limit is $175, Employer P provides qualified
parking with a fair market value of $220 per month to its employees,
but charges each employee $45 per month.
(ii) In this Example 3, because the sum of the amount paid by an
employee ($45) plus the amount excludable for qualified parking
($175) is not less than the fair market value of the monthly
benefit, no amount is includible in the employee's wages for income
and employment tax purposes with respect to the qualified parking.
Q-9. Are excludable qualified transportation fringes calculated on
a monthly basis?
A-9. (a) In general. Yes. The value of transportation in a
commuter highway vehicle, transit passes, and qualified parking is
calculated on a monthly basis to determine whether the value of the
benefit has exceeded the applicable statutory monthly limit on
qualified transportation fringes. Except in the case of a transit
pass provided to an employee, the applicable statutory monthly limit
applies to qualified transportation fringes used by the employee in
a month. Monthly exclusion amounts are not combined to provide a
qualified transportation fringe for any month exceeding the
statutory limit. A month is a calendar month or a substantially
equivalent period applied consistently.
(b) Transit passes. In the case of transit passes provided to an
employee, the applicable statutory monthly limit applies to the
transit passes provided by the employer to the employee in a month
for that month or for any previous month in the calendar year. In
addition, transit passes distributed in advance for more than one
month, but not for more than twelve months, are qualified
transportation fringes if the requirements in paragraph (c) of this
Q/A-9 are met (relating to the income tax and employment tax
treatment of advance transit passes). The applicable statutory
monthly limit under section 132(f)(2) on the combined amount of
transportation in a commuter highway vehicle and transit passes may
be calculated by taking into account the monthly limits for all
months for which the transit passes are distributed. In the case of
a pass that is valid for more than one month, such as an annual
pass, the value of the pass may be divided by the number of months
for which it is valid for purposes of determining whether the value
of the pass exceeds the statutory monthly limit.
(c) Rule if employee's employment terminates-- (1) income tax
treatment. The value of transit passes provided in advance to an
employee with respect to a month in which the individual is not an
employee is included in the employee's wages for income tax
purposes.
(2) Reporting and employment tax treatment. Transit passes
distributed in advance to an employee are excludable from wages for
employment tax purposes under sections 3121, 3306, and 3401 (FICA,
FUTA, and income tax withholding) if the employer distributes
transit passes to the employee in advance for not more than three
months and, at the time the transit passes are distributed, there is
not an established date that the employee's employment will
terminate (for example, if the employee has given notice of
retirement) which will occur before the beginning of the last month
of the period for which the transit passes are provided. If the
employer distributes transit passes to an employee in advance for
not more than three months and at the time the transit passes are
distributed there is an established date that the employee's
employment will terminate, and the employee's employment does
terminate before the beginning of the last month of the period for
which the transit passes are provided, the value of transit passes
provided for months beginning after the date of termination during
which the employee is not employed by the employer is included in
the employee's wages for employment tax purposes. If transit passes
are distributed in advance for more than three months, the value of
transit passes provided for the months during which the employee is
not employed by the employer is includible in the employee's wages
for employment tax purposes regardless of whether at the time the
transit passes were distributed there was an established date of
termination of the employee's employment.
(d) Examples. The following examples illustrate the principles of
this Q/A-9: Example 1.
(i) Employee E incurs $150 for qualified parking used during the
month of June of a year in which the statutory monthly parking limit
is $175, for which E is reimbursed $150 by Employer R. Employee E
incurs $180 in expenses for qualified parking used during the month
of July of that year, for which E is reimbursed $180 by Employer R.
(ii) In this Example 1, because monthly exclusion amounts may not
be combined to provide a benefit in any month greater than the
applicable statutory limit, the amount by which the amount
reimbursed for July exceeds the applicable statutory monthly limit
($180 minus $175 equals $5) is includible in Employee E's wages for
income and employment tax purposes.
Example 2.
(i) Employee F receives transit passes from Employer G with a value
of $195 in March of a year (for which the statutory monthly transit
pass limit is $65) for January, February, and March of that year. F
was hired during January and has not received any transit passes
from G.
(ii) In this Example 2, the value of the transit passes (three
months times $65 equals $195) is excludable from F's wages for
income and employment tax purposes.
Example 3.
(i) Employer S has a qualified transportation fringe benefit plan
under which its employees receive transit passes near the beginning
of each calendar quarter for that calendar quarter. All employees of
Employer S receive transit passes from Employer S with a value of
$195 on March 31 for the second calendar quarter covering the months
April, May, and June (of a year in which the statutory monthly
transit pass limit is $65).
(ii) In this Example 3, because the value of the transit passes
may be calculated by taking into account the monthly limits for all
months for which the transit passes are distributed, the value of
the transit passes (three months times $65 equals $195) is
excludable from the employees' wages for income and employment tax
purposes. Example 4.
(i) Same facts as in Example 3, except that Employee T, an employee
of Employer S, terminates employment with S on May 31. There was not
an established date of termination for Employee T at the time the
transit passes were distributed.
(ii) In this Example 4, because at the time the transit passes
were distributed there was not an established date of termination
for Employee T, the value of the transit passes provided for June
($65) is excludable from T's wages for employment tax purposes.
However, the value of the transit passes distributed to Employee T
for June ($65) is not excludable from T's wages for income tax
purposes.
(iii) If Employee T's May 31 termination date was established at
the time the transit passes were provided, the value of the transit
passes provided for June ($65) is included in T's wages for both
income and employment tax purposes. Example 5.
(i) Employer F has a qualified transportation fringe benefit plan
under which its employees receive transit passes semi-annually in
advance of the months for which the transit passes are provided. All
employees of Employer F, including Employee X, receive transit
passes from F with a value of $390 on June 30 for the 6 months of
July through December (of a year in which the statutory monthly
transit pass limit is $65). Employee X's employment terminates and
his last day of work is August
1. Employer F's other employees remain employed throughout the
remainder of the year.
(ii) In this Example 5, the value of the transit passes provided
to Employee X for the months September, October, November, and
December ($65 times 4 months equals $260) of the year is included in
X's wages for income and employment tax purposes. The value of the
transit passes provided to Employer F's other employees is
excludable from the employees' wages for income and employment tax
purposes.
Example 6.
(i) Each month during a year in which the statutory monthly transit
pass limit is $65, Employer R distributes transit passes with a face
amount of $70 to each of its employees. Transit passes with a face
amount of $70 can be purchased from the transit system by any
individual for $65.
(ii) In this Example 6, because the value of the transit passes
distributed by Employer R does not exceed the applicable statutory
monthly limit ($65), no portion of the value of the transit passes
is included as wages for income and employment tax purposes.
Q-10. May an employee receive qualified transportation fringes
from more than one employer?
A-10. (a) General rule. Yes. The statutory monthly limits
described in Q/A-7 of this section apply to benefits provided by an
employer to its employees. For this purpose, all employees treated
as employed by a single employer under section 414(b), (c), (m), or
(o) are treated as employed by a single employer. See section 414(t)
and §1.132-1(c). Thus, qualified transportation fringes paid by
entities under common control under section 414(b), (c), (m), or (o)
are combined for purposes of applying the applicable statutory
monthly limit. In addition, an individual who is treated as a leased
employee of the employer under section 414(n) is treated as an
employee of that employer for purposes of section 132. See section
414(n)(3)(C).
(b) Examples. The following examples illustrate the principles of
this Q/A-10: Example 1.
(i) During a year in which the statutory monthly qualified parking
limit is $175, Employee E works for Employers M and N, who are
unrelated and not treated as a single employer under section 414(b),
(c), (m), or (o). Each month, M and N each provide qualified parking
benefits to E with a value of $100.
(ii) In this Example 1, because M and N are unrelated employers,
and the value of the monthly parking benefit provided by each is not
more than the applicable statutory monthly limit, the parking
benefits provided by each employer are excludable as qualified
transportation fringes assuming that the other requirements of this
section are satisfied.
Example 2.
(i) Same facts as in Example 1, except that Employers M and N are
treated as a single employer under section 414(b).
(ii) In this Example 2, because M and N are treated as a single
employer, the value of the monthly parking benefit provided by M and
N must be combined for purposes of determining whether the
applicable statutory monthly limit has been exceeded. Thus, the
amount by which the value of the parking benefit exceeds the monthly
limit ($200 minus the monthly limit amount of $175 equals $25) for
each month in the year is includible in E's wages for income and
employment tax purposes.
Q-11. May qualified transportation fringes be provided to
employees pursuant to a compensation reduction agreement?
A-11. Yes. An employer may offer employees a choice between cash
compensation and any qualified transportation fringe. An employee
who is offered this choice and who elects qualified transportation
fringes is not required to include the cash compensation in income
if--
(a) The election is pursuant to an arrangement described in Q/A-12
of this section;
(b) The amount of the reduction in cash compensation does not
exceed the limitation in Q/A-13 of this section;
(c) The arrangement satisfies the timing and reimbursement rules
in Q/A-14 and 16 of this section; and
(d) The related fringe benefit arrangement otherwise satisfies the
requirements set forth elsewhere in this section. Q-12. What is a
compensation reduction election for purposes of section 132(f)?
A-12. (a) Election requirements generally. A compensation
reduction arrangement is an arrangement under which the employer
provides the employee with the right to elect whether the employee
will receive either a fixed amount of cash compensation at a
specified future date or a fixed amount of qualified transportation
fringes to be provided for a specified future period (such as
qualified parking to be used during a future calendar month). The
employee's election must be in writing or another form, such as
electronic, that includes, in a permanent and verifiable form, the
information required to be in the election. The election must
contain the date of the election, the amount of the compensation to
be reduced, and the period for which the benefit will be provided.
The election must relate to a fixed dollar amount or fixed
percentage of compensation reduction. An election to reduce
compensation for a period by a set amount for such period may be
automatically renewed for subsequent periods.
(b) Automatic election permitted. An employer may provide under
its qualified transportation fringe benefit plan that a compensation
reduction election will be deemed to have been made if the employee
does not elect to receive cash compensation in lieu of the qualified
transportation fringe, provided that the employee receives adequate
notice that a compensation reduction will be made and is given
adequate opportunity to choose to receive the cash compensation
instead of the qualified transportation fringe.
Q-13. Is there a limit to the amount of the compensation
reduction?
A-13. Yes. Each month, the amount of the compensation reduction
may not exceed the combined applicable statutory monthly limits for
transportation in a commuter highway vehicle, transit passes, and
qualified parking. For example, for a year in which the statutory
monthly limit is $65 for transportation in a commuter highway
vehicle and transit passes, and $175 for qualified parking, an
employee could elect to reduce compensation for any month by no more
than $240 ($65 plus $175) with respect to qualified transportation
fringes. If an employee were to elect to reduce compensation by $250
for a month, the excess $10 ($250 minus $240) would be includible in
the employee's wages for income and employment tax purposes.
Q-14. When must the employee have made a compensation reduction
election and under what circumstances may the amount be paid in cash
to the employee?
A-14. (a) The compensation reduction election must satisfy the
requirements set forth under paragraphs (b), (c), and (d) of this
Q/A-14.
(b) Timing of election. The compensation reduction election must
be made before the employee is able currently to receive the cash or
other taxable amount at the employee's discretion. The determination
of whether the employee is able currently to receive the cash does
not depend on whether it has been constructively received for
purposes of section 451. The election must specify that the period
(such as a calendar month) for which the qualified transportation
fringe will be provided must not begin before the election is made.
Thus, a compensation reduction election must relate to qualified
transportation fringes to be provided after the election. For this
purpose, the date a qualified transportation fringe is provided is--
(1) The date the employee receives a voucher or similar item; or
(2) In any other case, the date the employee uses the qualified
transportation fringe.
(c) Revocability of Lections. The employee may not revoke a
compensation reduction election after the employee is able currently
to receive the cash or other taxable amount at the employee's
discretion. In addition, the election may not be revoked after the
beginning of the period for which the qualified transportation
fringe will be provided.
(d) Compensation reduction amounts not refundable. Unless an
election is revoked in a manner consistent with paragraph (c) of
this Q/A-14, an employee may not subsequently receive the
compensation (in cash or any form other than by payment of a
qualified transportation fringe under the employer's plan). Thus, an
employer's qualified transportation fringe benefit plan may not
provide that an employee who ceases to participate in the employer's
qualified transportation fringe benefit plan (such as in the case of
termination of employment) is entitled to receive a refund of the
amount by which the employee's compensation reductions exceed the
actual qualified transportation fringes provided to the employee by
the employer.
(e) Examples. The following examples illustrate the principles of
this Q/A-14: Example 1.
(i) Employer P maintains a qualified transportation fringe benefit
arrangement during a year in which the statutory monthly limit is
$100 for transportation in a commuter highway vehicle and transit
passes (2002 or later) and $180 for qualified parking. Employees of
P are paid cash compensation twice per month, with the payroll dates
being the first and the fifteenth day of the month. Under P's
arrangement, an employee is permitted to elect at any time before
the first day of a month to reduce his or her compensation payable
during that month in an amount up to the applicable statutory
monthly limit ($100 if the employee elects coverage for
transportation in a commuter highway vehicle or a mass transit pass,
or $180 if the employee chooses qualified parking) in return for the
right to receive qualified transportation fringes up to the amount
of the election. If such an election is made, P will provide a mass
transit pass for that month with a value not exceeding the
compensation reduction amount elected by the employee or will
reimburse the cost of other qualified transportation fringes used by
the employee on or after the first day of that month up to the
compensation reduction amount elected by the employee. Any
compensation reduction amount elected by the employee for the month
that is not used for qualified transportation fringes is not
refunded to the employee at any future date.
(ii) In this Example 1, the arrangement satisfies the
requirements of this Q/A-14 because the election is made before the
employee is able currently to receive the cash and the election
specifies the future period for which the qualified transportation
fringes will be provided. The arrangement would also satisfy the
requirements of this Q/A-14 and Q/A-13 of this section if employees
are allowed to elect to reduce compensation up to $280 per month
($100 plus $180).
(iii) The arrangement would also satisfy the requirements of this
Q/A-14 (and Q/A- 13 of this section) if employees are allowed to
make an election at any time before the first or the fifteenth day
of the month to reduce their compensation payable on that payroll
date by an amount not in excess of one-half of the applicable
statutory monthly limit (depending on the type of qualified
transportation fringe elected by the employee) and P provides a mass
transit pass on or after the applicable payroll date for the
compensation reduction amount elected by the employee for the
payroll date or reimburses the cost of other qualified
transportation fringes used by the employee on or after the payroll
date up to the compensation reduction amount elected by the employee
for that payroll date.
Example 2.
(i) Employee Q elects to reduce his compensation payable on March 1
of a year (for which the statutory monthly mass transit limit is
$65) by $195 in exchange for a mass transit voucher to be provided
in March. The election is made on the preceding February 27.
Employee Q was hired in January of the year. On March 10 of the
year, the employer of Employee Q delivers to Employee Q a mass
transit voucher worth $195 for the months of January, February, and
March.
(ii) In this Example 2, $65 is included in Employee Q's wages for
income and employment tax purposes because the compensation
reduction election fails to satisfy the requirement in this Q/A-14
and Q/A-12 of this section that the period for which the qualified
transportation fringe will be provided not begin before the election
is made to the extent the election relates to $65 worth of transit
passes for January of the year. The $65 for February is not taxable
because the election was for a future period that includes at least
one day in February.
(iii) However, no amount would be included in Employee Q's wages
as a result of the election if $195 worth of mass transit passes
were instead provided to Q for the months of February, March, and
April (because the compensation reduction would relate solely to
fringes to be provided for a period not beginning before the date of
the election and the amount provided does not exceed the aggregate
limit for the period, i.e., the sum of $65 for each of February,
March, and April). See Q/A-9 of this section for rules governing
transit passes distributed in advance for more than one month.
Example 3.
(i) Employee R elects to reduce his compensation payable on March 1
of a year (for which the statutory monthly parking limit is $175) by
$185 in exchange for reimbursement by Employer T of parking expenses
incurred by Employee R for parking on or near Employer T's business
premises during the period beginning after the date of the election
through March. The election is made on the preceding February 27.
Employee R incurs $10 in parking expenses on February 28 of the
year, and $175 in parking expenses during the month of March. On
April 5 of the year, Employer T reimburses Employee R $185 for the
parking expenses incurred on February 28, and during March, of the
year.
(ii) In this Example 3, no amount would be includible in Employee
R's wages for income and employment tax purposes because the
compensation reduction related solely to parking on or near Employer
R's business premises used during a period not beginning before the
date of the election and the amount reimbursed for parking used in
any one month does not exceed the statutory monthly limitation.
Q-15. May an employee whose qualified transportation fringe costs
are less than the employee's compensation reduction carry over this
excess amount to subsequent periods?
A-15. (a) Yes. An employee may carry over unused compensation
reduction amounts to subsequent periods under the plan of the
employee's employer.
(b) The following example illustrates the principles of this
Q/A-15: Example.
(i) By an election made before November 1 of a year for which the
statutory monthly mass transit limit is $65, Employee E elects to
reduce compensation in the amount of $65 for the month of November.
E incurs $50 in employee-operated commuter highway vehicle expenses
during November for which E is reimbursed $50 by Employer R, E's
employer. By an election made before December, E elects to reduce
compensation by $65 for the month of December. E incurs $65 in
employee- operated commuter highway vehicle expenses during December
for which E is reimbursed $65 by R. Before the following January, E
elects to reduce compensation by $50 for the month of January. E
incurs $65 in employee-operated commuter highway vehicle expenses
during January for which E is reimbursed $65 by R because R allows E
to carry over to the next year the $15 amount by which the
compensation reductions for November and December exceeded the
employee-operated commuter highway vehicle expenses incurred during
those months.
(ii) In this Example, because Employee E is reimbursed in an
amount not exceeding the applicable statutory monthly limit, and the
reimbursement does not exceed the amount of employee-operated
commuter highway vehicle expenses incurred during the month of
January, the amount reimbursed ($65) is excludable from E's wages
for income and employment tax purposes.
Q-16. How does section 132(f) apply to expense reimbursements?
A-16. (a) In general. The term qualified transportation fringe
includes cash reimbursement by an employer to an employee for
expenses incurred or paid by an employee for transportation in a
commuter highway vehicle or qualified parking. The term qualified
transportation fringe also includes cash reimbursement for transit
passes made under a bona fide reimbursement arrangement, but, in
accordance with section 132(f)(3), only if permitted under paragraph
(b) of this Q/A-16. The reimbursement must be made under a bona fide
reimbursement arrangement which meets the rules of paragraph (c) of
this Q/A-16. A payment made before the date an expense has been
incurred or paid is not a reimbursement. In addition, a bona fide
reimbursement arrangement does not include an arrangement that is
dependent solely upon an employee certifying in advance that the
employee will incur expenses at some future date.
(b) Special rule for transit passes-- (1) In general. The term
qualified transportation fringe includes cash reimbursement for
transit passes made under a bona fide reimbursement arrangement,
but, in accordance with section 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. If a voucher is readily available, the requirement that a
voucher be distributed in-kind by the employer is satisfied if the
voucher is distributed by the employer or by another person on
behalf of the employer (for example, if a transit operator credits
amounts to the employee's fare card as a result of payments made to
the operator by the employer).
(2) Voucher or similar item. For purposes of the special rule in
paragraph (b) of this Q/A-16, a transit system voucher is an
instrument that may be purchased by employers from a voucher
provider that is accepted by one or more mass transit operators
(e.g., train, subway, and bus) in an area as fare media or in
exchange for fare media. Thus, for example, a transit pass that may
be purchased by employers directly from a voucher provider is a
transit system voucher.
(3) Voucher provider. The term voucher provider means any person
in the trade or business of selling transit system vouchers to
employers, or any transit system or transit operator that sells
vouchers to employers for the purpose of direct distribution to
employees. Thus, a transit operator might or might not be a voucher
provider. A voucher provider is not, for example, a third-party
employee benefits administrator that administers a transit pass
benefit program for an employer using vouchers that the employer
could obtain directly.
(4) Readily available. For purposes of this paragraph (b), a
voucher or similar item is readily available for direct distribution
by the employer to employees if and only if an employer can obtain
it from a voucher provider that-
(i) does not impose fare media charges that cause vouchers to not
be readily available as described in paragraph (b)(5) of this
section; and
(ii) does not impose other restrictions that cause vouchers to
not be readily available as described in paragraph (b)(6) of this
section.
(5) Fare media charges. For purposes of paragraph (b)(4) of this
section, fare media charges relate only to fees paid by the employer
to voucher providers for vouchers. The determination of whether
obtaining a voucher would result in fare media charges that cause
vouchers to not be readily available as described in this paragraph
(b) is made with respect to each transit system voucher. If more
than one transit system voucher is available for direct distribution
to employees, the employer must consider the fees imposed for the
lowest cost monthly voucher for purposes of determining whether the
fees imposed by the voucher provider satisfy this paragraph.
However, if transit system vouchers for multiple transit systems are
required in an area to meet the transit needs of the individual
employees in that area, the employer has the option of averaging the
costs applied to each transit system voucher for purposes of
determining whether the fare media charges for transit system
vouchers satisfy this paragraph. Fare media charges are described in
this paragraph (b)(5), and therefore cause vouchers to not be
readily available, if and only if the average annual fare media
charges that the employer reasonably expects to incur for transit
system vouchers purchased from the voucher provider (disregarding
reasonable and customary delivery charges imposed by the voucher
provider, e.g., not in excess of $15) are more than 1 percent of the
average annual value of the vouchers for a transit system.
(6) Other restrictions. For purposes of paragraph (b)(4) of this
section, restrictions that cause vouchers to not be readily
available are restrictions imposed by the voucher provider other
than fare media charges that effectively prevent the employer from
obtaining vouchers appropriate for distribution to employees.
Examples of such restrictions include--
(i) Advance purchase requirements. Advance purchase requirements
cause vouchers to not be readily available only if the voucher
provider does not offer vouchers at regular intervals or fails to
provide the voucher within a reasonable period after receiving
payment for the voucher. For example, a requirement that vouchers
may be purchased only once per year may effectively prevent an
employer from obtaining vouchers for distribution to employees. An
advance purchase requirement that vouchers be purchased not more
frequently than monthly does not effectively prevent the employer
from obtaining vouchers for distribution to employees.
(ii) Purchase quantity requirements. Purchase quantity
requirements cause vouchers to not be readily available if the
voucher provider does not offer vouchers in quantities that are
reasonably appropriate to the number of the employer's employees who
use mass transportation (for example, the voucher provider requires
a $1,000 minimum purchase and the employer seeks to purchase only
$200 of vouchers).
(iii) .Lmitations on denominations of vouchers that are available.
If the voucher provider does not offer vouchers in denominations
appropriate for distribution to the employer's employees, vouchers
are not readily available. For example, vouchers provided in $5
increments up to the monthly limit are appropriate for distribution
to employees, while vouchers available only in a denomination equal
to the monthly limit are not appropriate for distribution to
employees if the amount of the benefit provided to the employer's
employees each month is normally less than the monthly limit.
(7) Example. The following example illustrates the principles of
this paragraph (b): Example.
(i) Company C in City X sells mass transit vouchers to employers in
the metropolitan area of X in various denominations appropriate for
distribution to employees. Employers can purchase vouchers monthly
in reasonably appropriate quantities. Several different bus, rail,
van pool, and ferry operators service X, and a number of the
operators accept the vouchers either as fare media or in exchange
for fare media. To cover its operating expenses, C imposes on each
voucher a 50 cents charge, plus a reasonable and customary $15
charge for delivery of each order of vouchers. Employer M disburses
vouchers purchased from C to its employees who use operators that
accept the vouchers and M reasonably expects that $55 is the average
value of the voucher it will purchase from C for the next calendar
year.
(ii) In this Example, vouchers for X are readily available for
direct distribution by the employer to employees because the
expected cost of the vouchers disbursed to M's employees for the
next calendar year is not more than 1 percent of the value of the
vouchers (50 cents divided by $55 equals 0.91 percent), the delivery
charges are disregarded because they are reasonable and customary,
and there are no other restrictions that cause the vouchers to not
be readily available. Thus, any reimbursement of mass transportation
costs in X would not be a qualified transportation fringe.
(c) Substantiation requirements. 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. For purposes of section 132(f), whether cash
reimbursements are made under a bona fide reimbursement arrangement
may vary depending on the facts and circumstances, including the
method or methods of payment utilized within the mass transit
system. The employer must implement reasonable procedures to ensure
that an amount equal to the reimbursement was incurred for
transportation in a commuter highway vehicle, transit passes, or
qualified parking. The expense must be substantiated within a
reasonable period of time. An expense substantiated to the payor
within 180 days after it has been paid will be treated as having
been substantiated within a reasonable period of time. An employee
certification at the time of reimbursement in either written or
electronic form may be a reasonable reimbursement procedure
depending on the facts and circumstances. Examples of reasonable
reimbursement procedures are set forth in paragraph (d) of this
Q/A-16.
(d) Illustrations of reasonable reimbursement procedures. The
following are examples of reasonable reimbursement procedures for
purposes of paragraph (c) of this Q/A-16. In each case, the
reimbursement is made at or within a reasonable period after the end
of the events described in paragraphs (d)(1) through (d)(3) of this
section.
(1) An employee presents to the employer a parking expense
receipt for parking on or near the employer's business premises, the
employee certifies that the parking was used by the employee, and
the employer has no reason to doubt the employee's certification.
(2) An employee either submits a used time-sensitive transit pass
(such as a monthly pass) to the employer and certifies that he or
she purchased it or presents an unused or used transit pass to the
employer and certifies that he or she purchased it and the employee
certifies that he or she has not previously been reimbursed for the
transit pass. In both cases, the employer has no reason to doubt the
employee's certification.
(3) If a receipt is not provided in the ordinary course of
business (e.g., if the employee uses metered parking or if used
transit passes cannot be returned to the user), the employee
certifies to the employer the type and the amount of expenses
incurred, and the employer has no reason to doubt the employee's
certification.
Q-17. May an employer provide nontaxable cash reimbursement under
section 132(f) for periods longer than one month?
A-17. (a) General rule. Yes. Qualified transportation fringes
include reimbursement to employees for costs incurred for
transportation in more than one month, provided the reimbursement
for each month in the period is calculated separately and does not
exceed the applicable statutory monthly limit for any month in the
period. See Q/A-8 and 9 of this section if the limit for a month is
exceeded.
(b) Example. The following example illustrates the principles of
this Q/A-17: Example.
(i) Employee R pays $100 per month for qualified parking used during
the period from April 1 through June 30 of a year in which the
statutory monthly qualified parking limit is $175. After receiving
adequate substantiation from Employee R, R's employer reimburses R
$300 in cash on June 30 of that year.
(ii) In this Example, because the value of the reimbursed expenses
for each month did not exceed the applicable statutory monthly
limit, the $300 reimbursement is excludable from R's wages for
income and employment tax purposes as a qualified transportation
fringe.
Q-18. What are the substantiation requirements if an employer
distributes transit passes?
A-18. There are no substantiation requirements if the employer
distributes transit passes. Thus, an employer may distribute a
transit pass for each month with a value not more than the statutory
monthly limit without requiring any certification from the employee
regarding the use of the transit pass.
Q-19. May an employer choose to impose substantiation requirements
in addition to those described in this regulation?
A-19. Yes.
Q-20. How is the value of parking determined?
A-20. Section 1.61-21(b)(2) applies for purposes of determining
the value of parking.
Q-21. How do the qualified transportation fringe rules apply to
van pools?
A-21. (a) Van pools generally. Employer and employee-operated van
pools, as well as private or public transit-operated van pools, may
qualify as qualified transportation fringes. The value of van pool
benefits which are qualified transportation fringes may be excluded
up to the applicable statutory monthly limit for transportation in a
commuter highway vehicle and transit passes, less the value of any
transit passes provided by the employer for the month.
(b) Employer-operated van pools. The value of van pool
transportation provided by or for an employer to its employees is
excludable as a qualified transportation fringe, provided the van
qualifies as a commuter highway vehicle as defined in section 132(f)
(5)(B) and Q/A-2 of this section. A van pool is operated by or for
the employer if the employer purchases or leases vans to enable
employees to commute together or the employer contracts with and
pays a third party to provide the vans and some or all of the costs
of operating the vans, including maintenance, liability insurance
and other operating expenses.
(c) Employee-operated van pools. Cash reimbursement by an employer
to employees for expenses incurred for transportation in a van pool
operated by employees independent of their employer are excludable
as qualified transportation fringes, provided that the van qualifies
as a commuter highway vehicle as defined in section 132(f)(5)(B) and
Q/A-2 of this section. See Q/A-16 of this section for the rules
governing cash reimbursements.
(d) Private or public transit-operated van pool transit passes.
The qualified transportation fringe exclusion for transit passes is
available for travel in van pools owned and operated either by
public transit authorities or by any person in the business of
transporting persons for compensation or hire. In accordance with
paragraph (b) of Q/A-3 of this section, the van must seat at least 6
adults (excluding the driver). See Q/A-16(b) and (c) of this section
for a special rule for cash reimbursement for transit passes and the
substantiation requirements for cash reimbursement.
(e) Value of van pool transportation benefits. Section 1.61-21(b)
(2) provides that the fair market value of a fringe benefit is based
on all the facts and circumstances. Alternatively, transportation in
an employer-provided commuter highway vehicle may be valued under
the automobile lease valuation rule in §1.61-21(d), the vehicle
cents-per- mile rule in §1.61-21(e), or the commuting valuation
rule in §1.61-21(f). If one of these special valuation rules is
used, the employer must use the same valuation rule to value the use
of the commuter highway vehicle by each employee who share the use.
See §1.61-21(c)(2)(i)(B).
(f) Qualified parking prime member. If an employee obtains a
qualified parking space as a result of membership in a car or van
pool, the applicable statutory monthly limit for qualified parking
applies to the individual to whom the parking space is assigned.
This individual is the prime member. In determining the tax
consequences to the prime member, the statutory monthly limit
amounts of each car pool member may not be combined. If the employer
provides access to the space and the space is not assigned to a
particular individual, then the employer must designate one of its
employees as the prime member who will bear the tax consequences.
The employer may not designate more than one prime member for a car
or van pool during a month. The employer of the prime member is
responsible for including the value of the qualified parking in
excess of the statutory monthly limit in the prime member's wages
for income and employment tax purposes.
Q-22. What are the reporting and employment tax requirements for
qualified transportation fringes?
A-22. (a) Employment tax treatment generally. Qualified
transportation fringes not exceeding the applicable statutory
monthly limit described in Q/A-7 of this section are not wages for
purposes of the Federal Insurance Contributions Act (FICA), the
Federal Unemployment Tax Act (FUTA), and federal income tax
withholding. Any amount by which an employee elects to reduce
compensation as provided in Q/A-11 of this section is not subject to
the FICA, the FUTA, and federal income tax withholding. Qualified
transportation fringes exceeding the applicable statutory monthly
limit described in Q/A- 7 of this section are wages for purposes of
the FICA, the FUTA, and federal income tax withholding and are
reported on the employee's Form W-2, Wage and Tax Statement.
(b) Employment tax treatment of cash reimbursement exceeding
monthly limits. Cash reimbursement to employees (for example, cash
reimbursement for qualified parking) in excess of the applicable
statutory monthly limit under section 132(f) is treated as paid for
employment tax purposes when actually or constructively paid. See
§§31.3121(a)-2(a), 31.3301-4, 31.3402(a)-1(b) of this
chapter. Employers must report and deposit the amounts withheld in
addition to reporting and depositing other employment taxes. See
Q/A-16 of this section for rules governing cash reimbursements.
(c) Noncash fringe benefits exceeding monthly limits. If the
value of noncash qualified transportation fringes exceeds the
applicable statutory monthly limit, the employer may elect, for
purposes of the FICA, the FUTA, and federal income tax withholding,
to treat the noncash taxable fringe benefits as paid on a pay
period, quarterly, semi-annual, annual, or other basis, provided
that the benefits are treated as paid no less frequently than
annually.
Q-23. How does section 132(f) interact with other fringe benefit
rules?
A-23. For purposes of section 132, the terms working condition
fringe and de minimis fringe do not include any qualified
transportation fringe under section 132(f). If, however, an employer
provides local transportation other than transit passes (without any
direct or indirect compensation reduction election), the value of
the benefit may be excludable, either totally or partially, under
fringe benefit rules other than the qualified transportation fringe
rules under section 132(f). See §§1.132-6(d)(2)(i)
(occasional local transportation fare), 1.132-6(d)(2)(iii)
(transportation provided under unusual circumstances), and
1.61-21(k) (valuation of local transportation provided to qualified
employees). See also Q/A-4(b) of this section.
Q-24. May qualified transportation fringes be provided to
individuals who are partners, 2-percent shareholders of S-
corporations, or independent contractors?
A-24. (a) General rule. Section 132(f)(5)(E) states that self-
employed individuals who are employees within the meaning of section
401(c)(1) are not employees for purposes of section 132(f).
Therefore, individuals who are partners, sole proprietors, or other
independent contractors are not employees for purposes of section
132(f). In addition, under section 1372(a), 2-percent shareholders
of S corporations are treated as partners for fringe benefit
purposes. Thus, an individual who is both a 2-percent shareholder of
an S corporation and a common law employee of that S corporation is
not considered an employee for purposes of section 132(f). However,
while section 132(f) does not apply to individuals who are partners,
2-percent shareholders of S corporations, or independent
contractors, other exclusions for working condition and de minimis
fringes may be available as described in paragraphs (b) and (c) of
this Q/A-24. See §§1.132-1(b)(2) and 1.132-1(b)(4).
(b) Transit passes. The working condition and de minimis fringe
exclusions under section 132(a)(3) and (4) are available for transit
passes provided to individuals who are partners, 2-percent
shareholders, and independent contractors. For example, tokens or
farecards provided by a partnership to an individual who is a
partner that enable the partner to commute on a public transit
system (not including privately-operated van pools) are excludable
from the partner's gross income if the value of the tokens and
farecards in any month does not exceed the dollar amount specified
in §1.132-6(d)(1). However, if the value of a pass provided in
a month exceeds the dollar amount specified in §1.132-6(d)(1),
the full value of the benefit provided (not merely the amount in
excess of the dollar amount specified in §1.132- 6(d)(1)) is
includible in gross income.
(c) Parking. The working condition fringe rules under section
132(d) do not apply to commuter parking. See §1.132-5(a)(1).
However, the de minimis fringe rules under section 132(e) are
available for parking provided to individuals who are partners, 2-
percent shareholders, or independent contractors that qualifies
under the de minimis rules. See §1.132-6(a) and (b).
(d) Example. The following example illustrates the principles of
this Q/A-24:
Example.
(i) Individual G is a partner in partnership P. Individual G
commutes to and from G's office every day and parks free of charge
in P's lot.
(ii) In this Example, the value of the parking is not excluded
under section 132(f), but may be excluded under section 132(e) if
the parking is a de minimis fringe under §1.132-6.
Q-25. What is the effective date of this section?
A-25. (a) Except as provided in paragraph (b) of this Q/A-25, this
section is applicable for employee taxable years beginning after
December 31, 2001.
(b) The last sentence of paragraph (b)(5) of Q/A-16 of this
section (relating to whether transit system vouchers for transit
passes are readily available) is applicable for employee taxable
years beginning after December 31, 2003. For this purpose, an
employer may assume that the employee taxable year is the calendar
year.
PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 5. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.
Par. 6. In §602.101, paragraph (b) is amended by adding an
entry in numerical order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section where Current OMB identified and described
control no.
* * * * *
1.132-9(b) ..........................................1545-1676
* * * * *
Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: 12/29/00
Jonathan Talisman
Acting Assistant Secretary of the Treasury
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