Revenue Ruling 2014-32 released November 21, 2014, reads like a primer for transportation fringe benefits provided through electronic media. The Revenue Ruling is written in a scenario format with eight different detailed scenarios followed by a thorough explanation of the law, including code sections, regulations numbers and Q/A references. An analysis of each scenario follows to explain why each particular scenario can or cannot be provided as a non-taxable fringe benefit to employees.
Below are outlined the employer transit payment processes followed, in bold italic, by the IRS holding for each scenario indicating whether or not the processes described allow for transit expenses to be excluded from the employee’s gross income. In all the following scenarios, it is assumed that the participant is not receiving a pre-tax benefit in excess of the monthly transit limit.
Situation 1. Transit system provides smartcards that employers use to provide transportation benefits to their employees. The amount stored on the smartcards can be used only for fare media and cannot be used for any other purpose. Employer makes monthly payments to the transit system, which loads these funds onto each employee’s smartcard as instructed by the employer. Employer does not require its employees to substantiate their use of the smartcards.
Qualifies as a transit pass and the value of the fare media may be excluded from employees’ gross income.
Situation 2. Employer provides to its employees terminal-restricted debit cards for use only at merchant terminals at which only fare media for local transit systems is sold. Employer sends funds to debit card provider on behalf of employees and debit card provider allocates the funds to each employee’s terminal-restricted debit card as instructed by the employer. Employer does not require its employees to substantiate their use of the debit cards.
Qualifies as a transit pass and the value of the fare media may be excluded from employees’ gross income.
Situation 3. Employer provides to its employees debit cards restricted by merchant category codes (MCCs) indicating that the merchant sells fare media. However, the merchant may or may not also sell other merchandise. A voucher or similar item exchangeable only for a transit pass is not otherwise readily available for purchase by the employer for direct distribution to employees.
For the first month that the employee participates in the program, employee pays for fare media using after-tax dollars. Employee then substantiates the expenses for that first month to his employer following reasonable substantiation procedures as described in Regulations Section 1.132-(9)(b) Q/A-16(c). The employer then sends an amount equal to the substantiated amount to the debit card provider to be electronically allocated to the debit card assigned to the employee.
For subsequent months, the employer reimburses the employee for fare media expenses incurred by providing funds to the debit card provider to be allocated to the employee’s debit card equal to the amount of fare media expenses substantiated under the following procedures. Employer receives and reviews periodic statements providing information on the use of each debit card which includes:
• The identity of the merchants at which the debit card was used.
• Dates and amounts of debit card transactions.
In addition, for the first month that the debit card is used, prior to providing any additional reimbursement through the debit card provider, the employer requires that employees certify that the debit card was used only to purchase fare media.
For subsequent months, the employer does not require any additional employee certifications prior to reimbursement of recurring expenses that match the seller and the time period covered for expenses previously substantiated (e.g., for employees who purchase a transit pass every month in the same amount from the same seller). In addition, the employer requires a recertification at least annually from each employee that the debit card was used only to purchase fare media.
If expenses increase (still within the monthly transit limit), participants pay the increased fare media expenses by some method other than the use of the debit card and submits all required information to the employer who substantiates the additional amount using a reasonable substantiation method. Once properly substantiated, this newest substantiated claim is now the basis for a recurring claim and future debit card purchases in the new amount using the same vendor. If the vendor changes, the employee re-substantiates the expenses for the first month incurred with the new vendor following reasonable substantiation procedures.
The MCC-restricted debit card is not a voucher, but is part of a bona fide reimbursement arrangement. Therefore, the value of the fare media provided to employees through the MCC-restricted debit cards may be excluded from employees’ gross income.
Situation 4. Employers obtain debit cards from a debit card provider in order to provide transportation benefits to their employees. The debit cards are restricted to MCCs indicating that the merchant sells fare media. However, the merchant may or may not sell other merchandise. A voucher or similar item exchangeable only for a transit pass is not otherwise readily available for purchase by the employer for direct distribution to employees.
The employer provides the MCC-restricted debit card to its employees as soon as they begin employment. Employer requires a certification from employees prior to using the debit card that the card will only be used to purchase fare media. In addition, written on each debit card is the statement that the card is to be used only for fare media and, by using the card, the employee certifies that the card is being used only to purchase fare media. At no time do the employees substantiate to the employer the amount of fare media expenses that have been incurred.
This debit card process is not a transit voucher and not a qualified reimbursement plan. The amounts the employer provides to its employees through the MCC-restricted debit cards are included in its employees’ gross income.
Situation 5. Employers obtain debit cards from a debit card provider in order to provide transportation benefits to their employees. The debit cards may be used to purchase fare media on several transit systems within the metropolitan area in which the employer is located. The debit cards are restricted to MCCs indicating that the merchant sells fare media. However, the merchant may or may not sell other merchandise. The employer, along with the debit card provider, places additional restrictions on the debit card based on the Merchant Identification Number (MIN). These restrictions block all purchases from any merchant in the area with an acceptable MCC that sells any items other than fare media. These restrictions have been tested and effectively prohibit recipients of the debit cards from using them to purchase any items other than fare media. Employer sends monthly payments to debit card provider who allocates the funds to each employee’s debit card as instructed by the employer. Employees are not required to substantiate their use of the debit cards.
Qualifies as a transit pass. The value of the fare media provided through the MCC-restricted debit cards is excluded from the employees’ income without requiring the employees to substantiate the use of the debit card. The value of the fare media is also excluded from its employees’ gross income.
Situation 6. Same facts as Situation 5, except the employer also provides the debit card to employees who commute using commuter highway vehicles (often called “vanpools”). The vanpool voucher provider does not sell any other merchandise. However, if purchases are made online by the employee, a reasonable and customary delivery charge is added to the vanpool voucher purchase.
Qualifies as a transit pass, including the delivery charge (aggregate cost cannot exceed the statutory monthly limit). The value of the fare media (and delivery charge) provided through MCC-restricted debit cards is excluded from employees’ income without requiring employees to substantiate the use of the debit card.
Situation 7. Two different employers provide employees with smartcards that may be used on a particular transit system. The smartcard includes separate accounts that separately track (a) funds provided directly by the employer that are available only for transit use, (b) funds provided directly by an employer that are only available for non-transit use (e.g., parking), and (c) funds added by the cardholder/employee that are available for either transit or non-transit use. Funds cannot be transferred between accounts.
A debit card provider has available debit cards, which may be used by employers to provide transportation benefits to their employees. Similar to Situation 5, the debit cards are restricted for use only at merchants that have been assigned an MCC indicating that the merchant sells fare media and the cards also contain restrictions based on a merchant’s MIN. Except as provided below, these restrictions block all purchases from any merchant in the area with an acceptable MCC that sells any items other than fare media.
One employer allows its employees to use the debit card to load fund onto the smartcard. When funds are loaded onto the smartcard using this debit card, the funds are automatically put into the account on the smartcard that allows these funds to be used for either transit or non-transit use. This employer does not require its employees to substantiate their use of the debit card.
To the extent the debit card is used to add funds, it does not qualify as a transit pass. The value of the benefits provided by this employer to its employees through the MCC-restricted debit card for use to fund the smartcard is included in the employees’ income.
By contrast, another employer provides funds directly to the transit system. Each month the transit system loads each of the employees’ smartcard accounts that can only be used for transit. The employer does not require its employees to substantiate their use of the smartcard.
Qualifies as a transit pass. The value of the fare media added to the employees’ transit accounts is excluded from the employees’ income and is excluded from employees’ gross income.
Situation 8. Employer has been providing transit benefits to its employees via a bona fide reimbursement arrangement. A debit card provider offers a terminal-restricted debit card, which is readily available for use in the employer’s geographic area of business. The terminal-restricted debit card is the only readily available voucher or similar item in the area.
Beginning after December 31, 2015, employers may not provide qualified transportation fringe benefits in the form of cash reimbursement for transit passes because the terminal-restricted debit cards qualify as transit passes and are readily available. The amount of cash reimbursed for transit passes is included in its employees’ gross income.
Employers should confirm that their transit debit card provider offers terminal-restricted debit cards for all regions of the country that comply with all the approved scenarios outlined by the IRS including pass fulfillment for transit and vanpooling.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
