IRS Updates Guidance on Taxation of Electronically-Provided Qualified Transportation Fringe Benefits

Author: Rena Pirsos, XpertHR Legal Editor

November 26, 2014

The IRS has issued Revenue Ruling 2014-32 (Rev. Rul.) providing guidance on the tax consequences of employer use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringe benefits to employees. The Rev. Rul. also discusses whether mandatory delivery charges employees incur when ordering vanpool vouchers are qualified transportation fringe benefits.

An IRS Rev. Rul. is a decision by the agency on how a section of the Internal Revenue Code (IRC) is to be applied to a given set of facts. Employers may use the information as guidance when faced with the same, or similar, circumstances as those discussed in the ruling. In Rev. Rul. 2014-32, the IRS discusses eight factual scenarios that illustrate its conclusions as to whether the value of the described employer-provided transportation fringe benefits would be excluded from employees' taxable income and from their wages for employment tax (Social Security and Medicare, and federal unemployment insurance) purposes.

What the Law Says

In general, the IRC allows employers to provide employees with transportation fringe benefits on a tax-free (a.k.a., qualified) basis up to certain dollar limitations. These benefits include transportation in commuter highway vehicles that enable employees to commute to work (e.g., a van or car pool), transit passes, parking and bicycle commuting reimbursements.

Transit passes include passes, tokens, fare cards, vouchers and similar items that entitle employees to free rides, or reduced-rate rides, on a mass transit system or in a commercial commuter highway vehicle. To be tax free, an employer must distribute the passes directly to employees and may only make cash reimbursements to the employees if the passes cannot be purchased directly from a transit provider and the employees substantiate their costs (e.g., they present an old transit pass as proof of their expenses). Employees do not have to substantiate their expenses if they receive the passes directly from the employer.

Background

An IRS Rev. Rul. issued in 2006 allowed employers to provide transit passes electronically through smartcards and debit cards. The IRS noted in the 2006 ruling that it would issue guidance on terminal-restricted debit cards, which were generally unavailable at the time and that, in the meantime, employers could reimburse employees with cash for transit passes when the only available voucher or similar item was a terminal-restricted debit card. The IRS subsequently issued a Notice in 2012 requesting public comments on the 2006 ruling due to technological advances made since the ruling was issued.

Now, Rev. Rul. 2014-32 finally updates, and supersedes, the 2006 ruling based on the comments received.

Smartcards

A smartcard includes a memory chip that uniquely identifies the card and the value stored on the card. They are usually provided by transit systems and can only be used either as fare media, or to purchase fare media. Employers make monthly payments to a transit system, which are allocated to each employee's smartcard. Employers do not require the employees to substantiate their use of the smartcards.

The IRS concludes in the new Rev. Rul. that if the value stored on employees' smartcards may only be used as fare media for a transit system, they qualify as transit passes under the IRC and the value of the fare media is not taxable to employees for federal income or employment tax purposes.

Terminal-Restricted Debit Cards

A terminal-restricted debit card is preloaded monthly by an employer and can only be used by an employee at terminal locations where only fare media for local transit systems are sold. The IRS concludes in Rev. Rul. 2014-32 that the value of fare media (transit benefits) provided through employer-provided terminal-restricted debit cards are federal income and employment tax free to employees. In addition, media bought online with such cards may include delivery charges that would qualify for the tax exclusion.

Merchant Category Code-Restricted Debit Cards (MCC-Debit Cards)

MCC-debit cards work the same way as terminal-restricted debit cards but can only be used at merchants that have been assigned a merchant category code indicating that the merchant sells fare media.

In a scenario discussed in the Rev. Rul., vouchers that can be exchanged only for transit passes are not otherwise available for purchase by the employer for direct distribution to employees. In addition, the employer provides the MCC-debit cards to employees when they begin working for the employer. Even though the employees must certify that they will use the card only to purchase fare media, they do not have to substantiate the amount of fare media expenses they incur.

The IRS concludes that the amounts provided by the employer to the employees via the MCC-debit cards are subject to federal income and employment taxes because:

  • The cards do not qualify as a transit system voucher under IRC regulations;
  • The arrangement is not a bona fide reimbursement arrangement because it provides for advances rather than reimbursements and relies solely on employee certifications before the expense is incurred; and
  • Employee certifications alone do not provide sufficient substantiation for a bona fide reimbursement arrangement.

Exclusion for Vanpool Delivery Charges

Rev. Rul. 2014-32 also rescinds the IRS's temporary accommodation for employers without access to terminal-restricted debit cards that it provided in its 2006 ruling. After December 31, 2015, employers are no longer permitted to provide qualified transportation fringe benefits in the form of cash reimbursement for transit passes in geographic areas where a terminal-restricted debit card is readily available.