Question: What can employees do when they have a commuter benefit account balance but no ongoing expenses that qualify for reimbursement?
Short Answer: The Section 132 rules that apply to tax-advantaged commuter benefits prohibit any refunds or cash outs (even on a taxable basis) of the remaining account balance. However, new IRS guidance permits employees to roll over any unused mass transit/vanpooling commuter account balance to the parking benefit balance, and vice versa.
Commuter Benefit Accounts: Contributions Not Refundable
Section 132(f) governs tax-advantaged commuter accounts for transit pass/vanpooling and parking with strict limitations to qualify for the benefits. A key limitation is the prohibition on cashing out employees or terminated employees on the unused amount of their contributions. Another key principle is the prohibition of participation in commuter benefits for terminated employees.
There are three main situations where these §132 limitations commonly cause employee consternation in practice:
- Current employees have a large commuter account balance but no ongoing commuter expenses;
- Terminated employees end employment with a large commuter balance remaining; and
- Current employees only have ongoing parking expenses, but their commuter account balance amount remaining is for transit pass/vanpooling.
Situation #1: Current Employees with a Commuter Account Balance but No Ongoing Commuter Expenses
In this first situation, the §132 rules are clear that the employee cannot subsequently receive the compensation that was contributed to the commuter account in cash or any form other than by payment of a qualifying commuter expense under the employer’s plan. This means the employee cannot be cashed out (even on a taxable basis) for any unused commuter balance—regardless of whether the employee is no longer incurring qualifying commuter expenses.
Keep in mind that the Section 125 cafeteria plan irrevocable election rules do not apply to commuter pre-tax elections. Under the separate Section 132 exemption from constructive receipt that applies only to employee pre-tax mass transit/vanpooling and parking contributions, employees can change their contribution election prospectively each month before the month begins. This permits employees to freely join, increase, decrease, or revoke commuter benefit elections each month for any reason.
- For more details, see: Monthly Commuter Benefit Election Changes.
Employees who no longer are incurring qualifying commuter expenses can therefore elect to discontinue all future transit/parking contributions on a prospective basis. However, as the IRS recently reiterated in Information Letter 2020-0031, amounts already contributed remain nonrefundable and available only for qualifying commuter expenses.
Situation #2: Terminated Employees End Employment with Commuter Account Balance Remaining
In this second situation, the §132 rules are clear that only current employees can participate in the commuter account. Furthermore, the prohibition on refunds or cash outs of unused commuter account balances extends to situations where the employee ceases to participate, such as participation of employment.
Any unused commuter balance upon termination must be forfeited to the employer after any applicable run-out period. Employers may retain the forfeitures, allocate them evenly to the accounts of other commuter participants, use the amounts for plan administrative expenses, or use them any other purpose. Unlike the cafeteria plan rules applicable to experience gains caused by FSA forfeitures, there are no rules governing employer use of forfeitures.
- For more details, see: Commuter Benefits Upon Termination of Employment.
Employees terminating employment should therefore make every effort to exhaust the balance in their commuter account prior to termination. Needless to say, that can be much more difficult where an employee is unexpectedly terminated. However, as the IRS recently reiterated in Information Letter 2019-0002, “this rule does not distinguish between employees who are fired (or involuntarily terminated) and those that quit their employment voluntarily.”
The stark result for terminated employees is they cannot a) receive a refund (even on a taxable basis) of any remaining commuter account balance, or b) use the remaining commuter funds for continued commuter expenses post-termination. Section 132 simply requires the forfeiture of the remaining balance after any applicable run-out period.
Situation #3: Current Employees with Transit Balance but Currently Have Only Parking Expenses
Since Covid, employees are generally using less mass transit and vanpooling to commute to work. Many employees who previously commuted by public transportation are now driving to work and incurring parking expenses.
The IRS recently issued Information Letter 2020-0024 addressing this issue for a commuter benefit program participant with a mass transit/vanpool commuter account balance. The participant is now exclusively using his personal vehicle to drive to work due to Covid concerns. In a rare bit of good news, the IRS response provided some welcome relief to the many employees in the same situation.
Under the new guidance, the IRS stated that employers can structure the commuter benefit program plan design to permit rolling over unused transit benefit amounts to be used for the parking benefit balance as long as the maximum monthly amount ($270 in 2021) is not exceeded.
On the flip side, the guidance also permits commuter benefit plans to allow employees to roll over unused parking benefit amounts to be used for the mass transit/vanpool benefit balance as long as the maximum monthly amount ($270 in 2021) is not exceeded. This will provide additional welcome relief for employees with a parking balance who begin commuting again via public transportation when they feel comfortable doing so.
This commuter benefit program ability to roll over unused transit balance to parking and vice versa is an optional plan design feature. Employers wishing to offer this newly available rollover feature will want to consult with their commuter account TPA to confirm the offering.
Reminders: Work-From Home Situations
Since working from home has become so much more common because of the pandemic, a few of reminders of issues that arise more frequently:
- Home Parking Not a Qualifying Expense: Employees cannot use the commuter account to pay for parking at home. Even where an employee has home parking expenses (e.g., at an apartment or condo building) and works from home, parking on or near property used by the employee for residential purposes is not a qualified parking expense. (Treas. Reg. §1.132-9, Q/A-4(c)).
- Telework Work Can Satisfy Bay Area Commuter Benefits Ordinance: The Bay Area Commuter Benefits Program recently added a new option for employers to comply by having a policy to allow employees to telework at least one day per week. See our prior post for full details: Bay Area Commuter Benefits Program Adds New Telework Option.
- Employer Reimbursement of Transit Expenses Prohibited: Since 2016, the IRS has prohibited employer reimbursement of transit expenses on a tax-free basis under §132. Therefore, employers can provide §132 tax-free mass transit benefits only through a terminal-restricted debit card (or old-fashioned commuter checks), which generally will require the employer to engage with a commuter benefits TPA. See our prior post for full details: Employer Commuter Benefit Subsidies.
The Section 132 rules do not permit commuter benefit account refunds or cash outs of any kind, even on a taxable basis. Furthermore, terminated employees cannot continue to incur reimbursable commuter benefit expenses after terminating employment.
Employers cannot make exceptions to these strict legal limitations because failure to follow the rules runs the risk that all employees would lose the pre-tax benefit of their commuter elections if discovered by the IRS. Jeopardizing the §132 tax-advantaged status of the benefit is not a viable option.
These cold realities of the Code can create significant hardships for employees who are no longer commuting to work in the same manner as prior to the pandemic, as well as for employees who are terminated (particularly involuntarily and unexpectedly) with a significant balance remaining in their commuter account.
Fortunately, there are two silver linings that can assist current employees in minimizing the potential for commuter benefit forfeitures:
- Employees who no longer are incurring qualifying commuter expenses can always elect to discontinue all future transit/parking contributions on a prospective basis. Employees who revoke their election to contribute any further commuter benefit amounts will at least stop increasing the balance of unused funds.
- Employers can now offer employees the ability to roll over any unused mass transit/vanpooling commuter account balance to the parking benefit balance, and vice versa. The new IRS guidance permitting this approach provides a welcome productive outlet particularly for employees who commuted by public transportation prior to the pandemic but are now driving to work.
IRS Information Letter 2020-0031:
In no case, however, may the employer provide a cash refund, even when the employee’s compensation reduction amounts exceed the employee’s qualified transportation fringes. Regulations Section 1.132-9, Q&A 14. In other words, an employee may receive a cash reimbursement of compensation reduction amounts only as a reimbursement of qualified transportation fringes.
at due to the COVID-19 pandemic, an employee’s previously elected reoccurring compensation reduction may need proper adjustment for the future. If an employee makes no election change, their compensation reductions will automatically continue, and funds will continue to accrue and roll over monthly. However, if an employee makes an election change, future compensation reductions may be reduced or stopped. An employee may revoke a compensation reduction election at any time during the year before the employee is able to receive the cash or other taxable amount at the employee’s discretion and before the beginning of the period for which the qualified transportation fringe will be provided. Regulations Section 1.132-9, Q&A 14(c). Funds available prior to the revocation of a compensation reduction election will continue to be available and may be rolled over for use in a subsequent month, subject to the limitation that the employee may not receive qualified transportation fringes that exceed the maximum monthly excludable amount in any month.
IRS Information Letter 2019-002:
When an employee is fired, compensation reduction amounts are not refundable to the employee. This applies even though the employee’s contributions may exceed the actual qualified transportation benefits the employer provided to the employee. As stated in Treasury Regulation Section 1.132-9, Q/A-14, this rule does not distinguish between employees who are fired (or involuntarily terminated) and those that quit their employment voluntarily.
Employees who stop participating in an employer’s qualified transportation benefit plan without cancelling their compensation reduction election cannot receive a refund of any amount. In addition, the terminated employee cannot use the funds for continued transportation expenses.
Information Letter 2020-0024:
However, an employee is not precluded from later receiving the compensation through the use of another qualified transportation fringe, such as qualified parking, to the extent it is offered by the employer’s plan and it does not exceed the maximum monthly amount for the respective qualified transportation fringe benefit.
In addition, an employee is permitted to use the unused amounts for other qualified transportation fringe benefits offered under the employer’s plan, such as qualified parking, as long as the fringe benefits satisfy all other requirements outlined in Section 1.132-9 of the regulations and the unused amounts do not exceed the maximum monthly limitation for the respective qualified transportation fringe benefit.
(4) No constructive receipt.
No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.
Treas. Reg. §1.132-9, Q/A-4(c):
(c) However, parking on or near property used by the employee for residential purposes is not qualified parking.
Treas. Reg. §1.132-9, Q/A-14(c):
(c) Revocability of elections. The employee may not revoke a compensation reduction election after the employee is able currently to receive the cash or other taxable amount at the employee’s discretion. In addition, the election may not be revoked after the beginning of the period for which the qualified transportation fringe will be provided.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).