The IRS has released an information letter about a qualified transportation plan that discontinued cash reimbursement of transit expenses and began requiring that those expenses be paid using an electronic debit card. As the letter explains, qualified transit plans are permitted to offer cash reimbursement for transit passes only if no voucher or similar item that can be exchanged only for a transit pass is “readily available” for distribution to employees. IRS guidance initially allowed employers to make cash reimbursements even if terminal-restricted debit cards were available. (Terminal-restricted debit cards are those that can only be used at merchant terminals that sell only fare media.) Later, however, the IRS ruled that cash reimbursements are not permitted after 2015 in a geographic area if terminal-restricted debit cards are “readily available”. Cash reimbursements are also prohibited in geographic areas where other readily available debit cards qualify as transit passes. Like the plan discussed in an earlier letter on this subject, this plan eliminated cash reimbursement of transit expenses in 2016 when the change in the rules became effective.
This letter notes that the situations described “do not appear” to prevent the cards from being treated as readily available, and it simply assumes that the cards qualify as vouchers that may be exchanged only for transit passes. The letter goes on to explain, however, that the plan could require use of the cards regardless of the outcome of factual determinations on those issues. Employers are not required to establish transportation plans, and while the requirements necessary to exclude transit benefits from income and employment taxes are determined by the Code, employers are free to impose additional restrictions.
Comment: This letter reinforces a fundamental point about qualified transportation plan design, namely, that after assuring that the minimum requirements are met for favorable tax treatment, employers are free to impose additional restrictions. While those additional conditions should be carefully considered for their effects on employees and administration, there are no tax nondiscrimination rules for qualified transportation plans, so employers do not need to consider, for example, whether the restrictions tend to favor more highly compensated employees. Of course, other rules, such as federal employment nondiscrimination laws, may still apply.