IRS Limits Retroactive Cash Reimbursements for Transit Benefits



Considering providing your employees with cash reimbursement payments for retroactive tax-free benefit increases for qualified mass transit and vanpools for 2015? 

In response to employer questions, the Internal Revenue Service said employers can’t provide employees with cash reimbursements for 2015 transit benefit amounts that retroactively became nontaxable, unless transit vouchers are unavailable and the reimbursements are provided under an accountable plan (Office of Chief Counsel, program manager technical advice memorandum: PMTA 2016-01). 

“If transit passes are readily available in the employer’s area, the Code doesn’t provide an income or employment tax exclusion for transit benefits paid to employees in cash,” the IRS said in the memorandum.

On the other hand, if transit passes aren’t readily available and employers provide transit benefits in the form of cash reimbursements, employers must have a bona fide reimbursement arrangement under which employees must actually incur and substantiate the expenses, it said.

Under the Consolidated Appropriations Act of 2016 (the CAA of 2016) (Pub. L. No. 114-113), the tax-free transit and vanpool benefits were retroactively increased to $250 a month for 2015, bringing them into parity with parking benefits.

However, throughout 2015, employers providing their employees with qualified mass transit or vanpool benefits under tax code Section 132(f) were required to tax amounts in excess of $130 a month. 

In this way, employees who contributed more than the monthly excludable amount of $130 a month for mass transit and vanpool commuting expenses would have been taxed on those contributions that later became nontaxable under increased benefit amounts in the CAA.

In addition, the CAA permanently re-established parity for tax-free benefit amounts for mass transit, vanpool and parking, thus eliminating the need for Congressional actions on transportation parity on an annual basis.

Meanwhile, under IRS Notice 2016-6, the limit on tax-free employer-provided mass transit, vanpool and parking benefits for 2016 has been increased to $255 a month.

See related story, Transit Benefit Reimbursements Often Not Excludable.

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