Employers' Cash Reimbursements for Malfunctioning Transit Cards Are Taxable Income

(Parker Tax Publishing January 2020)

The Office of Chief Counsel advised that for newly hired or returning seasonal transit pass users, cash reimbursements may be, under appropriate circumstances, properly viewed as a qualified transportation fringe under Code Sec. 132(f). However, the Office of Chief Counsel determined that any cash reimbursements for transit pass users with malfunctioning cards are not qualified transportation fringe benefits under Code Sec. 132(f)(5) and are taxable. CCA 201949019.

Background

Under Code Sec. 132(a)(5), the value of the qualified transportation benefits provided by an employer to an employee, including transit passes, is generally excludable from the employee's gross income to the extent that value does not exceed certain dollar limitations. Code Sec. 132(f)(5)(A) defines a transit pass as any pass, token, fare card, smart-card, voucher or similar item that entitles a person to use mass transit free of charge or at a reduced price. In Rev. Rul. 2014-32, the IRS ruled that debit cards constitute transit passes within the meaning of Code Sec. 132(f)(5)(A) and Reg. Sec. 1.132-9(b), Q/A-3, as long as the value stored on the cards is usable only as fare media for transit systems or to purchase only fare media for transit systems.

Code Sec. 132(f)(3) provides that a cash reimbursement by an employer to an employee for a transit pass is a qualified transportation benefit only if a voucher or similar item which may be exchanged for a transit pass is not readily available for direct distribution by the employer to the employee. Under Reg. Sec. 1.132-9(b) Q/A-16(b)(4) and (b)(6), a voucher or similar item is readily available if and only if the employer can obtain it from a provider that does not impose restrictions that effectively prevent the employer from obtaining vouchers for distribution to employees. Examples of such restrictions include advance purchase requirements, purchase quantity requirements, and limitations on denominations of vouchers that are available.

Voucher providers may impose a timing delay on the purchase of transit passes by the employer for its employees' use. For example, the voucher provider may require the employer to only enroll new participants on a certain day of the month. Similarly, voucher providers may require a certain amount of time to prepare and issue a voucher/debit card to new employees, and this may prevent the employer from providing the voucher to the employee immediately when the employee begins work. Other circumstances may exist under which the voucher provider delays the provision of a transit pass to the employer for providing to its employees.

Office of Chief Counsel's Advice

In CCM 201949019, the Office of Chief Counsel was asked for advice regarding the taxability of an employer's cash reimbursement to an employee for expenses incurred in the use of transit due to malfunctioning transit cards or systems.

The Office of Chief Counsel found that Reg. Sec. 1.132-9(b) Q/A-16 and Code Sec. 132(f)(3) focus on the availability of vouchers to the employer for distribution to employees, not subsequent use by the employee once they are distributed. Thus, according to the Office of Chief Counsel, if the transit system imposes timing delays on the purchase or distribution of transit passes because of the transit system's agreement with the employer, this may be viewed as a restriction that effectively makes the vouchers or transit passes not readily available to the employer for distribution to employees. The Office of Chief Counsel advised that under these limited circumstances, provided that the applicable substantiation requirements are met, the employer may provide qualified transportation fringe benefits through cash reimbursements.

However, the Office of Chief Counsel concluded that malfunctions in the card (e.g., the chip stops working) or malfunctions in the system reading the card (e.g., the card reader goes down during the commute) do not mean that the transit pass was not readily available to the employer for distribution within the meaning of Code Sec. 132(f)(3). The Office of Chief Counsel reasoned that when an employer provides a transit card to the employee, the benefit is considered provided. According to the Office of Chief Counsel, in these circumstances one would expect the employee to contact the transportation provider to have the malfunction remedied or to provide the transportation. Because the employee has a valid card, it would be the transportation system's responsibility to honor the card and address possible technical malfunctions. The card need only entitle the employee to the benefit, and there is no requirement, according to the Chief Counsel's Office, that the employee ultimately avail him or herself of the transit benefit or that the benefit be available to at any time for the employee's use.

Thus, according to the Office of Chief Counsel, cash reimbursements for expenses incurred in the use of transit due to malfunctioning cards or systems are not qualified transportation fringe benefits and the value of any cash reimbursements provided for such expenses is included in the employee's income and is included in wages subject to FICA, FUTA, and income tax withholding.

For a discussion of qualified transportation fringe benefits, see Parker Tax ¶123,140.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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