IRS Questions and Answers
The IRS proposed rules are presented in question and answer format as follows:
Q. Can an employee receive tax-favored transportation benefits from two different employers?
A. Yes. Take the example of an employee who works in a factory during the day and is a security guard at a warehouse at night. The employee uses mass transit to commute to each job. The employee could opt to have each employer reduce his or her salary up to $65 a month for a total of $130 – to cover the cost of the transit pass.
Q. Let’s say an employee drives to a commuter parking lot and from there takes a commuter train to work. What would be the maximum pretax contribution employees could make toward each expense?
A. The monthly limit would be $65 for commuter train costs and $175 for parking expenses, meaning the employee could make total pretax contributions of up to $240 a month for a combination of mass transit and parking expenses. In other words, the mass transit and parking expenses limits are independent and do not offset each other.
Q. What is considered “qualified parking” eligible for this benefit?
A. Qualified parking includes parking on or near an employer’s business premises or a location from which employees commute to work, such as by van pool and mass transit.
Q. At companies that offer such a plan, how does an employee opt to have his or her salary reduced to pay for transportation expenses?
A. The employee must elect in writing or electronically to have his or her salary reduced by a certain fixed dollar amount or percentage of salary, up to the statutory limits. The employee’s election then can automatically be renewed for subsequent periods.
However, this election must be made prior to the period in which transportation services are used. An employee could not, for example, ask to have his salary reduced by $175 in February to pay $175 of parking expenses paid in January.
Q. Can an employee revoke an election?
A. Yes, but only if done before the next period for which he or she had the right to receive the pretax contribution as cash.
Take the case of an employer whose payroll dates are the first and 15th day of each month. Employees can elect at any time before the first day of a month and 15th day of a month to reduce their salaries to pay for qualified transportation expenses by one-half of the monthly maximum limit.
In this example, an employee opts to have his or her salary reduced by $50 for each pay period to cover parking expenses. Employees are paid on the first and the 15th day of the month.
On the 2nd day of the month, the employee is injured and no longer can drive to work. The employee could not retroactively recover the $50 covering parking expenses for the first two weeks of the month. But the employee could revoke the election for the last two weeks of the month.
Q. Can an employee carry over contributions that are not used in a month to cover future transportation expenses?
A. Yes. The IRS provides an example of an employee who, prior to Nov. 1, 1999, agrees to reduce his salary by $65 in November to cover van-pooling expenses that month.
The employee, though, incurs only $50 in van-pooling expenses in November and is reimbursed $50 by his employer.
Prior to Dec. 1, 1999, the employee elects to reduce his salary by $65 for December. The employee incurs $65 in van-pooling expenses in December and is fully reimbursed by his employer. Before Jan.1, 2000 the employee agrees to reduce his salary by $50 for January van-pooling expenses. In January, the employee incurs $65 in expenses. The employer then can reimburse the employee for $65 because the $15 in prior unused salary reduction for van-pooling expenses can be carried over and applied to current expenses.
This carryover feature makes the IRS rules for employer-provided transportation benefits strikingly different for the IRS’ so called “use it or lose it” rules for flexible spending accounts and other flexible benefit plan arrangements.
Under those rules, employees agree, for example, to reduce their salaries – prior to the start of a plan year - by a fixed amount during the next year and transfer those contributions to an FSA. Funds are withdrawn during the year to pay for uncovered benefit expenses, such as new eyeglasses, and any funds remaining in the FSA at the end of the year are forfeited.