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[Federal Register: January 11, 2001 (Volume 66, Number 8)]
[Rules and Regulations]
[Page 2241-2251]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja01-10]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service (IRS)
26 CFR Parts 1 and 602
[TD 8933]
RIN 1545-AX33
Qualified Transportation Fringe Benefits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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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 21st 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 Sec. 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
[[Page 2242]]
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 determining 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 transportation 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 determining 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.
[[Page 2243]]
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
Sec. 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 Sec. 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
Sec. 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. Secs. 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
[[Page 2244]]
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
Employment taxes, Income 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 Sec. 1.132-5(p)(4)
2. Adding entries for Sec. 1.132-9.
The additions read as follows:
Sec. 1.132-0 Outline of regulations under section 132.
* * * * *
Sec. 1.132-5 Working condition fringes.
* * * * *
(p) * * *
(4) Dates of applicability.
* * * * *
Sec. 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:
Sec. 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 Sec. 1.132-9.
* * * * *
Par. 4. Section 1.132-9 is added to read as follows:
Sec. 1.132-9 Qualified transportation fringes.
(a) Table of contents. This section contains a list of the
questions and answers in Sec. 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.
[[Page 2245]]
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 transportation 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 Sec. 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 Sec. 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 Sec. 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
[[Page 2246]]
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
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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 Sec. 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 elections. 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
[[Page 2248]]
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
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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) Limitations 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
[[Page 2250]]
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 Sec. 1.61-21(d), the vehicle
cents-per-mile rule in Sec. 1.61-21(e), or the commuting valuation rule
in Sec. 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
Sec. 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.
[[Page 2251]]
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
Secs. 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 Secs. 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 Secs. 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 Sec. 1.132-
6(d)(1). However, if the value of a pass provided in a month exceeds
the dollar amount specified in Sec. 1.132-6(d)(1), the full value of
the benefit provided (not merely the amount in excess of the dollar
amount specified in Sec. 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 Sec. 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 Sec. 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 Sec. 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 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 effective for taxable years beginning after
December 31, 2003.
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 Sec. 602.101, paragraph (b) is amended by adding an
entry in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b)
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.132-9(b).............................................. 1545-1676
* * * * *
------------------------------------------------------------------------
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 29, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-294 Filed 1-10-01; 8:45 am]
BILLING CODE 4830-01-P
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