Latest IRS advice on qualified transportation fringe benefits

Let your Payroll and A/P teams know that there’s new guidance from IRS on handling qualified transportation fringe benefits.

An advice memorandum from the Office of Chief Counsel looked closely at a company that decided to reimburse an employee in cash for a malfunctioning transit pass.

The Service’s reasoning

The overarching question at hand was: Does reimbursing employees with cash if their transit passes aren’t working (e.g., issues with card readers or card chips) affect the taxability of the fringe benefit?

IRS said yes. It explained that once an employee receives a transit pass, the fringe benefit is considered “provided” under law. After it’s been provided, the employee ultimately decides if and when to use it. And it’s up to the employee to contact the voucher provider if there’s a problem or malfunction with the transit pass.

As a result, this fringe benefit can no longer be excluded from income and should go through Payroll.

When A/P can get involved

Like many federal regulations your finance team must comply with, this one isn’t totally black and white. In the memorandum, IRS clarified that there are certain exceptions where similar fringe benefits may still be nontaxable and can go through A/P.

Example: If the voucher provider only issues new transit passes at a certain time of the month, a new hire at your company may not be able to get one right away. Here, it’d be appropriate for A/P to give them cash reimbursements until a pass can be issued.

So, you’ll want to remind your finance team that in most cases, once your company gives an employee cash as a benefit, gift or act of kindness, it becomes taxable. But they should still keep an eye out for special circumstances with fringe benefits like the example above, too.