[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.132-9]
[Page 578-591]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
COMPUTATION OF TAXABLE INCOME--Table of Contents
Sec. 1.132-9 Qualified transportation fringes.
(a) Table of contents. This section contains a list of the questions
and answers in Sec. 1.132-9.
(1) General rules.
Q-1. What is a qualified transportation fringe?
Q-2. What is transportation in a commuter highway vehicle?
Q-3. What are transit passes?
Q-4. What is qualified parking?
Q-5. May qualified transportation fringes be provided to individuals
who are not employees?
Q-6. Must a qualified transportation fringe benefit plan be in
writing?
(2) Dollar limitations.
Q-7. Is there a limit on the value of qualified transportation
fringes that may be excluded from an employee's gross income?
Q-8. What amount is includible in an employee's wages for income and
employment tax purposes if the value of the qualified transportation
fringe exceeds the applicable statutory monthly limit?
Q-9. Are excludable qualified transportation fringes calculated on a
monthly basis?
Q-10. May an employee receive qualified transportation fringes from
more than one employer?
(3) Compensation reduction.
Q-11. May qualified transportation fringes be provided to employees
pursuant to a compensation reduction agreement?
Q-12. What is a compensation reduction election for purposes of
section 132(f)?
Q-13. Is there a limit to the amount of the compensation reduction?
[[Page 579]]
Q-14. When must the employee have made a compensation reduction
election and under what circumstances may the amount be paid in cash to
the employee?
Q-15. May an employee whose qualified transportation fringe costs
are less than the employee's compensation reduction carry over this
excess amount to subsequent periods?
(4) Expense reimbursements.
Q-16. How does section 132(f) apply to expense reimbursements?
Q-17. May an employer provide nontaxable cash reimbursement under
section 132(f) for periods longer than one month?
Q-18. What are the substantiation requirements if an employer
distributes transit passes?
Q-19. May an employer choose to impose substantiation requirements
in addition to those described in this regulation?
(5) Special rules for parking and vanpools.
Q-20. How is the value of parking determined?
Q-21. How do the qualified transportation fringe rules apply to van
pools?
(6) Reporting and employment taxes.
Q-22. What are the reporting and employment tax requirements for
qualified transportation fringes?
(7) Interaction with other fringe benefits.
Q-23. How does section 132(f) interact with other fringe benefit
rules?
(8) Application to individuals who are not employees.
Q-24. May qualified transportation fringes be provided to
individuals who are partners, 2-percent shareholders of S-corporations,
or independent contractors?
(9) Effective date.
Q-25. What is the effective date of this section?
(b) Questions and answers.
Q-1. What is a qualified transportation fringe?
A-1. (a) The following benefits are qualified transportation fringe
benefits:
(1) Transportation in a commuter highway vehicle.
(2) Transit passes.
(3) Qualified parking.
(b) An employer may simultaneously provide an employee with any one
or more of these three benefits.
Q-2. What is transportation in a commuter highway vehicle?
A-2. Transportation in a commuter highway vehicle is transportation
provided by an employer to an employee in connection with travel between
the employee's residence and place of employment. A commuter highway
vehicle is a highway vehicle with a seating capacity of at least 6
adults (excluding the driver) and with respect to which at least 80
percent of the vehicle's mileage for a year is reasonably expected to
be--
(a) For transporting employees in connection with travel between
their residences and their place of employment; and
(b) On trips during which the number of employees transported for
commuting is at least one-half of the adult seating capacity of the
vehicle (excluding the driver).
Q-3. What are transit passes?
A-3. A transit pass is any pass, token, farecard, voucher, or
similar item (including an item exchangeable for fare media) that
entitles a person to transportation--
(a) On mass transit facilities (whether or not publicly owned); or
(b) Provided by any person in the business of transporting persons
for compensation or hire in a highway vehicle with a seating capacity of
at least 6 adults (excluding the driver).
Q-4. What is qualified parking?
A-4. (a) Qualified parking is parking provided to an employee by an
employer--
(1) On or near the employer's business premises; or
(2) At a location from which the employee commutes to work
(including commuting by carpool, commuter highway vehicle, mass transit
facilities, or transportation provided by any person in the business of
transporting persons for compensation or hire).
(b) For purposes of section 132(f), parking on or near the
employer's business premises includes parking on or near a work location
at which the employee provides services for the employer. However,
qualified parking does not include--
(1) The value of parking provided to an employee that is excludable
from gross income under section 132(a)(3) (as a working condition
fringe), or
(2) Reimbursement paid to an employee for parking costs that is
excludable from gross income as an amount treated as paid under an
accountable plan. See Sec. 1.62-2.
(c) However, parking on or near property used by the employee for
residential purposes is not qualified parking.
[[Page 580]]
(d) Parking is provided by an employer if--
(1) The parking is on property that the employer owns or leases;
(2) The employer pays for the parking; or
(3) The employer reimburses the employee for parking expenses (see
Q/A-16 of this section for rules relating to cash reimbursements).
Q-5. May qualified transportation fringes be provided to individuals
who are not employees?
A-5. An employer may provide qualified transportation fringes only
to individuals who are currently employees of the employer at the time
the qualified transportation fringe is provided. The term employee for
purposes of qualified transportation fringes is defined in Sec. 1.132-
1(b)(2)(i). This term includes only common law employees and other
statutory employees, such as officers of corporations. See Q/A-24 of
this section for rules regarding partners, 2-percent shareholders, and
independent contractors.
Q-6. Must a qualified transportation fringe benefit plan be in
writing?
A-6. No. Section 132(f) does not require that a qualified
transportation fringe benefit plan be in writing.
Q-7. Is there a limit on the value of qualified transportation
fringes that may be excluded from an employee's gross income?
A-7. (a) Transportation in a commuter highway vehicle and transit
passes. Before January 1, 2002, up to $65 per month is excludable from
the gross income of an employee for transportation in a commuter highway
vehicle and transit passes provided by an employer. On January 1, 2002,
this amount is increased to $100 per month.
(b) Parking. Up to $175 per month is excludable from the gross
income of an employee for qualified parking.
(c) Combination. An employer may provide qualified parking benefits
in addition to transportation in a commuter highway vehicle and transit
passes.
(d) Cost-of-living adjustments. The amounts in paragraphs (a) and
(b) of this Q/A-7 are adjusted annually, beginning with 2000, to reflect
cost-of-living. The adjusted figures are announced by the Service before
the beginning of the year.
Q-8. What amount is includible in an employee's wages for income and
employment tax purposes if the value of the qualified transportation
fringe exceeds the applicable statutory monthly limit?
A-8. (a) Generally, an employee must include in gross income the
amount by which the fair market value of the benefit exceeds the sum of
the amount, if any, paid by the employee and any amount excluded from
gross income under section 132(a)(5). Thus, assuming no other statutory
exclusion applies, if an employer provides an employee with a qualified
transportation fringe that exceeds the applicable statutory monthly
limit and the employee does not make any payment, the value of the
benefits provided in excess of the applicable statutory monthly limit is
included in the employee's wages for income and employment tax purposes.
See Sec. 1.61-21(b)(1).
(b) The following examples illustrate the principles of this Q/A-8:
Example 1. (i) For each month in a year in which the statutory
monthly transit pass limit is $100 (i.e., a year after 2001), Employer M
provides a transit pass valued at $110 to Employee D, who does not pay
any amount to Employer M for the transit pass.
(ii) In this Example 1, because the value of the monthly transit
pass exceeds the statutory monthly limit by $10, $120 ($110--$100, times
12 months) must be included in D's wages for income and employment tax
purposes for the year with respect to the transit passes.
Example 2. (i) For each month in a year in which the statutory
monthly qualified parking limit is $175, Employer M provides qualified
parking valued at $195 to Employee E, who does not pay any amount to M
for the parking.
(ii) In this Example 2, because the fair market value of the
qualified parking exceeds the statutory monthly limit by $20, $240
($195--$175, times 12 months) must be included in Employee E's wages for
income and employment tax purposes for the year with respect to the
qualified parking.
Example 3. (i) For each month in a year in which the statutory
monthly qualified parking limit is $175, Employer P provides qualified
parking with a fair market value of $220 per month to its employees, but
charges each employee $45 per month.
(ii) In this Example 3, because the sum of the amount paid by an
employee ($45) plus the amount excludable for qualified parking
[[Page 581]]
($175) is not less than the fair market value of the monthly benefit, no
amount is includible in the employee's wages for income and employment
tax purposes with respect to the qualified parking.
Q-9. Are excludable qualified transportation fringes calculated on a
monthly basis?
A-9. (a) In general. Yes. The value of transportation in a commuter
highway vehicle, transit passes, and qualified parking is calculated on
a monthly basis to determine whether the value of the benefit has
exceeded the applicable statutory monthly limit on qualified
transportation fringes. Except in the case of a transit pass provided to
an employee, the applicable statutory monthly limit applies to qualified
transportation fringes used by the employee in a month. Monthly
exclusion amounts are not combined to provide a qualified transportation
fringe for any month exceeding the statutory limit. A month is a
calendar month or a substantially equivalent period applied
consistently.
(b) Transit passes. In the case of transit passes provided to an
employee, the applicable statutory monthly limit applies to the transit
passes provided by the employer to the employee in a month for that
month or for any previous month in the calendar year. In addition,
transit passes distributed in advance for more than one month, but not
for more than twelve months, are qualified transportation fringes if the
requirements in paragraph (c) of this Q/A-9 are met (relating to the
income tax and employment tax treatment of advance transit passes). The
applicable statutory monthly limit under section 132(f)(2) on the
combined amount of transportation in a commuter highway vehicle and
transit passes may be calculated by taking into account the monthly
limits for all months for which the transit passes are distributed. In
the case of a pass that is valid for more than one month, such as an
annual pass, the value of the pass may be divided by the number of
months for which it is valid for purposes of determining whether the
value of the pass exceeds the statutory monthly limit.
(c) Rule if employee's employment terminates--(1) Income tax
treatment. The value of transit passes provided in advance to an
employee with respect to a month in which the individual is not an
employee is included in the employee's wages for income tax purposes.
(2) Reporting and employment tax treatment. Transit passes
distributed in advance to an employee are excludable from wages for
employment tax purposes under sections 3121, 3306, and 3401 (FICA, FUTA,
and income tax withholding) if the employer distributes transit passes
to the employee in advance for not more than three months and, at the
time the transit passes are distributed, there is not an established
date that the employee's employment will terminate (for example, if the
employee has given notice of retirement) which will occur before the
beginning of the last month of the period for which the transit passes
are provided. If the employer distributes transit passes to an employee
in advance for not more than three months and at the time the transit
passes are distributed there is an established date that the employee's
employment will terminate, and the employee's employment does terminate
before the beginning of the last month of the period for which the
transit passes are provided, the value of transit passes provided for
months beginning after the date of termination during which the employee
is not employed by the employer is included in the employee's wages for
employment tax purposes. If transit passes are distributed in advance
for more than three months, the value of transit passes provided for the
months during which the employee is not employed by the employer is
includible in the employee's wages for employment tax purposes
regardless of whether at the time the transit passes were distributed
there was an established date of termination of the employee's
employment.
(d) Examples. The following examples illustrate the principles of
this Q/A-9:
Example 1. (i) Employee E incurs $150 for qualified parking used
during the month of June of a year in which the statutory monthly
parking limit is $175, for which E is reimbursed $150 by Employer R.
Employee E incurs $180 in expenses for qualified parking used during the
month of July of that year, for which E is reimbursed $180 by Employer
R.
[[Page 582]]
(ii) In this Example 1, because monthly exclusion amounts may not be
combined to provide a benefit in any month greater than the applicable
statutory limit, the amount by which the amount reimbursed for July
exceeds the applicable statutory monthly limit ($180 minus $175 equals
$5) is includible in Employee E's wages for income and employment tax
purposes.
Example 2. (i) Employee F receives transit passes from Employer G
with a value of $195 in March of a year (for which the statutory monthly
transit pass limit is $65) for January, February, and March of that
year. F was hired during January and has not received any transit passes
from G.
(ii) In this Example 2, the value of the transit passes (three
months times $65 equals $195) is excludable from F's wages for income
and employment tax purposes.
Example 3. (i) Employer S has a qualified transportation fringe
benefit plan under which its employees receive transit passes near the
beginning of each calendar quarter for that calendar quarter. All
employees of Employer S receive transit passes from Employer S with a
value of $195 on March 31 for the second calendar quarter covering the
months April, May, and June (of a year in which the statutory monthly
transit pass limit is $65).
(ii) In this Example 3, because the value of the transit passes may
be calculated by taking into account the monthly limits for all months
for which the transit passes are distributed, the value of the transit
passes (three months times $65 equals $195) is excludable from the
employees' wages for income and employment tax purposes.
Example 4. (i) Same facts as in Example 3, except that Employee T,
an employee of Employer S, terminates employment with S on May 31. There
was not an established date of termination for Employee T at the time
the transit passes were distributed.
(ii) In this Example 4, because at the time the transit passes were
distributed there was not an established date of termination for
Employee T, the value of the transit passes provided for June ($65) is
excludable from T's wages for employment tax purposes. However, the
value of the transit passes distributed to Employee T for June ($65) is
not excludable from T's wages for income tax purposes.
(iii) If Employee T's May 31 termination date was established at the
time the transit passes were provided, the value of the transit passes
provided for June ($65) is included in T's wages for both income and
employment tax purposes.
Example 5. (i) Employer F has a qualified transportation fringe
benefit plan under which its employees receive transit passes semi-
annually in advance of the months for which the transit passes are
provided. All employees of Employer F, including Employee X, receive
transit passes from F with a value of $390 on June 30 for the 6 months
of July through December (of a year in which the statutory monthly
transit pass limit is $65). Employee X's employment terminates and his
last day of work is August 1. Employer F's other employees remain
employed throughout the remainder of the year.
(ii) In this Example 5, the value of the transit passes provided to
Employee X for the months September, October, November, and December
($65 times 4 months equals $260) of the year is included in X's wages
for income and employment tax purposes. The value of the transit passes
provided to Employer F's other employees is excludable from the
employees' wages for income and employment tax purposes.
Example 6. (i) Each month during a year in which the statutory
monthly transit pass limit is $65, Employer R distributes transit passes
with a face amount of $70 to each of its employees. Transit passes with
a face amount of $70 can be purchased from the transit system by any
individual for $65.
(ii) In this Example 6, because the value of the transit passes
distributed by Employer R does not exceed the applicable statutory
monthly limit ($65), no portion of the value of the transit passes is
included as wages for income and employment tax purposes.
Q-10. May an employee receive qualified transportation fringes from
more than one employer?
A-10. (a) General rule. Yes. The statutory monthly limits described
in Q/A-7 of this section apply to benefits provided by an employer to
its employees. For this purpose, all employees treated as employed by a
single employer under section 414(b), (c), (m), or (o) are treated as
employed by a single employer. See section 414(t) and Sec. 1.132-1(c).
Thus, qualified transportation fringes paid by entities under common
control under section 414(b), (c), (m), or (o) are combined for purposes
of applying the applicable statutory monthly limit. In addition, an
individual who is treated as a leased employee of the employer under
section 414(n) is treated as an employee of that employer for purposes
of section 132. See section 414(n)(3)(C).
(b) Examples. The following examples illustrate the principles of
this Q/A-10:
Example 1. (i) During a year in which the statutory monthly
qualified parking limit is $175, Employee E works for Employers M and N,
who are unrelated and not treated as a single employer under section
414(b), (c), (m), or (o). Each month, M and N each provide
[[Page 583]]
qualified parking benefits to E with a value of $100.
(ii) In this Example 1, because M and N are unrelated employers, and
the value of the monthly parking benefit provided by each is not more
than the applicable statutory monthly limit, the parking benefits
provided by each employer are excludable as qualified transportation
fringes assuming that the other requirements of this section are
satisfied.
Example 2. (i) Same facts as in Example 1, except that Employers M
and N are treated as a single employer under section 414(b).
(ii) In this Example 2, because M and N are treated as a single
employer, the value of the monthly parking benefit provided by M and N
must be combined for purposes of determining whether the applicable
statutory monthly limit has been exceeded. Thus, the amount by which the
value of the parking benefit exceeds the monthly limit ($200 minus the
monthly limit amount of $175 equals $25) for each month in the year is
includible in E's wages for income and employment tax purposes.
Q-11. May qualified transportation fringes be provided to employees
pursuant to a compensation reduction agreement?
A-11. Yes. An employer may offer employees a choice between cash
compensation and any qualified transportation fringe. An employee who is
offered this choice and who elects qualified transportation fringes is
not required to include the cash compensation in income if--
(a) The election is pursuant to an arrangement described in Q/A-12
of this section;
(b) The amount of the reduction in cash compensation does not exceed
the limitation in Q/A-13 of this section;
(c) The arrangement satisfies the timing and reimbursement rules in
Q/A-14 and 16 of this section; and
(d) The related fringe benefit arrangement otherwise satisfies the
requirements set forth elsewhere in this section.
Q-12. What is a compensation reduction election for purposes of
section 132(f)?
A-12. (a) Election requirements generally. A compensation reduction
arrangement is an arrangement under which the employer provides the
employee with the right to elect whether the employee will receive
either a fixed amount of cash compensation at a specified future date or
a fixed amount of qualified transportation fringes to be provided for a
specified future period (such as qualified parking to be used during a
future calendar month). The employee's election must be in writing or
another form, such as electronic, that includes, in a permanent and
verifiable form, the information required to be in the election. The
election must contain the date of the election, the amount of the
compensation to be reduced, and the period for which the benefit will be
provided. The election must relate to a fixed dollar amount or fixed
percentage of compensation reduction. An election to reduce compensation
for a period by a set amount for such period may be automatically
renewed for subsequent periods.
(b) Automatic election permitted. An employer may provide under its
qualified transportation fringe benefit plan that a compensation
reduction election will be deemed to have been made if the employee does
not elect to receive cash compensation in lieu of the qualified
transportation fringe, provided that the employee receives adequate
notice that a compensation reduction will be made and is given adequate
opportunity to choose to receive the cash compensation instead of the
qualified transportation fringe.
Q-13. Is there a limit to the amount of the compensation reduction?
A-13. Yes. Each month, the amount of the compensation reduction may
not exceed the combined applicable statutory monthly limits for
transportation in a commuter highway vehicle, transit passes, and
qualified parking. For example, for a year in which the statutory
monthly limit is $65 for transportation in a commuter highway vehicle
and transit passes, and $175 for qualified parking, an employee could
elect to reduce compensation for any month by no more than $240 ($65
plus $175) with respect to qualified transportation fringes. If an
employee were to elect to reduce compensation by $250 for a month, the
excess $10 ($250 minus $240) would be includible in the employee's wages
for income and employment tax purposes.
Q-14. When must the employee have made a compensation reduction
election and under what circumstances
[[Page 584]]
may the amount be paid in cash to the employee?
A-14. (a) The compensation reduction election must satisfy the
requirements set forth under paragraphs (b), (c), and (d) of this Q/A-
14.
(b) Timing of election. The compensation reduction election must be
made before the employee is able currently to receive the cash or other
taxable amount at the employee's discretion. The determination of
whether the employee is able currently to receive the cash does not
depend on whether it has been constructively received for purposes of
section 451. The election must specify that the period (such as a
calendar month) for which the qualified transportation fringe will be
provided must not begin before the election is made. Thus, a
compensation reduction election must relate to qualified transportation
fringes to be provided after the election. For this purpose, the date a
qualified transportation fringe is provided is--
(1) The date the employee receives a voucher or similar item; or
(2) In any other case, the date the employee uses the qualified
transportation fringe.
(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.
(d) Compensation reduction amounts not refundable. Unless an
election is revoked in a manner consistent with paragraph (c) of this Q/
A-14, an employee may not subsequently receive the compensation (in cash
or any form other than by payment of a qualified transportation fringe
under the employer's plan). Thus, an employer's qualified transportation
fringe benefit plan may not provide that an employee who ceases to
participate in the employer's qualified transportation fringe benefit
plan (such as in the case of termination of employment) is entitled to
receive a refund of the amount by which the employee's compensation
reductions exceed the actual qualified transportation fringes provided
to the employee by the employer.
(e) Examples. The following examples illustrate the principles of
this Q/A-14:
Example 1. (i) Employer P maintains a qualified transportation
fringe benefit arrangement during a year in which the statutory monthly
limit is $100 for transportation in a commuter highway vehicle and
transit passes (2002 or later) and $180 for qualified parking. Employees
of P are paid cash compensation twice per month, with the payroll dates
being the first and the fifteenth day of the month. Under P's
arrangement, an employee is permitted to elect at any time before the
first day of a month to reduce his or her compensation payable during
that month in an amount up to the applicable statutory monthly limit
($100 if the employee elects coverage for transportation in a commuter
highway vehicle or a mass transit pass, or $180 if the employee chooses
qualified parking) in return for the right to receive qualified
transportation fringes up to the amount of the election. If such an
election is made, P will provide a mass transit pass for that month with
a value not exceeding the compensation reduction amount elected by the
employee or will reimburse the cost of other qualified transportation
fringes used by the employee on or after the first day of that month up
to the compensation reduction amount elected by the employee. Any
compensation reduction amount elected by the employee for the month that
is not used for qualified transportation fringes is not refunded to the
employee at any future date.
(ii) In this Example 1, the arrangement satisfies the requirements
of this Q/A-14 because the election is made before the employee is able
currently to receive the cash and the election specifies the future
period for which the qualified transportation fringes will be provided.
The arrangement would also satisfy the requirements of this Q/A-14 and
Q/A-13 of this section if employees are allowed to elect to reduce
compensation up to $280 per month ($100 plus $180).
(iii) The arrangement would also satisfy the requirements of this Q/
A-14 (and Q/A-13 of this section) if employees are allowed to make an
election at any time before the first or the fifteenth day of the month
to reduce their compensation payable on that payroll date by an amount
not in excess of one-half of the applicable statutory monthly limit
(depending on the type of qualified transportation fringe elected by the
employee) and P provides a mass transit pass on or after the applicable
payroll date for the compensation reduction amount elected by the
employee for the payroll date or reimburses the cost of other qualified
transportation fringes used by the employee on or after the payroll date
up to the compensation reduction amount
[[Page 585]]
elected by the employee for that payroll date.
Example 2. (i) Employee Q elects to reduce his compensation payable
on March 1 of a year (for which the statutory monthly mass transit limit
is $65) by $195 in exchange for a mass transit voucher to be provided in
March. The election is made on the preceding February 27. Employee Q was
hired in January of the year. On March 10 of the year, the employer of
Employee Q delivers to Employee Q a mass transit voucher worth $195 for
the months of January, February, and March.
(ii) In this Example 2, $65 is included in Employee Q's wages for
income and employment tax purposes because the compensation reduction
election fails to satisfy the requirement in this Q/A-14 and Q/A-12 of
this section that the period for which the qualified transportation
fringe will be provided not begin before the election is made to the
extent the election relates to $65 worth of transit passes for January
of the year. The $65 for February is not taxable because the election
was for a future period that includes at least one day in February.
(iii) However, no amount would be included in Employee Q's wages as
a result of the election if $195 worth of mass transit passes were
instead provided to Q for the months of February, March, and April
(because the compensation reduction would relate solely to fringes to be
provided for a period not beginning before the date of the election and
the amount provided does not exceed the aggregate limit for the period,
i.e., the sum of $65 for each of February, March, and April). See Q/A-9
of this section for rules governing transit passes distributed in
advance for more than one month.
Example 3. (i) Employee R elects to reduce his compensation payable
on March 1 of a year (for which the statutory monthly parking limit is
$175) by $185 in exchange for reimbursement by Employer T of parking
expenses incurred by Employee R for parking on or near Employer T's
business premises during the period beginning after the date of the
election through March. The election is made on the preceding February
27. Employee R incurs $10 in parking expenses on February 28 of the
year, and $175 in parking expenses during the month of March. On April 5
of the year, Employer T reimburses Employee R $185 for the parking
expenses incurred on February 28, and during March, of the year.
(ii) In this Example 3, no amount would be includible in Employee
R's wages for income and employment tax purposes because the
compensation reduction related solely to parking on or near Employer R's
business premises used during a period not beginning before the date of
the election and the amount reimbursed for parking used in any one month
does not exceed the statutory monthly limitation.
Q-15. May an employee whose qualified transportation fringe costs
are less than the employee's compensation reduction carry over this
excess amount to subsequent periods?
A-15. (a) Yes. An employee may carry over unused compensation
reduction amounts to subsequent periods under the plan of the employee's
employer.
(b) The following example illustrates the principles of this Q/A-15:
Example. (i) By an election made before November 1 of a year for
which the statutory monthly mass transit limit is $65, Employee E elects
to reduce compensation in the amount of $65 for the month of November. E
incurs $50 in employee-operated commuter highway vehicle expenses during
November for which E is reimbursed $50 by Employer R, E's employer. By
an election made before December, E elects to reduce compensation by $65
for the month of December. E incurs $65 in employee-operated commuter
highway vehicle expenses during December for which E is reimbursed $65
by R. Before the following January, E elects to reduce compensation by
$50 for the month of January. E incurs $65 in employee-operated commuter
highway vehicle expenses during January for which E is reimbursed $65 by
R because R allows E to carry over to the next year the $15 amount by
which the compensation reductions for November and December exceeded the
employee-operated commuter highway vehicle expenses incurred during
those months.
(ii) In this Example, because Employee E is reimbursed in an amount
not exceeding the applicable statutory monthly limit, and the
reimbursement does not exceed the amount of employee-operated commuter
highway vehicle expenses incurred during the month of January, the
amount reimbursed ($65) is excludable from E's wages for income and
employment tax purposes.
Q-16. How does section 132(f) apply to expense reimbursements?
A-16. (a) In general. The term qualified transportation fringe
includes cash reimbursement by an employer to an employee for expenses
incurred or paid by an employee for transportation in a commuter highway
vehicle or qualified parking. The term qualified transportation fringe
also includes cash reimbursement for transit passes made under a bona
fide reimbursement arrangement, but, in accordance with section
132(f)(3), only if permitted under paragraph (b) of this Q/A-16. The
[[Page 586]]
reimbursement must be made under a bona fide reimbursement arrangement
which meets the rules of paragraph (c) of this Q/A-16. A payment made
before the date an expense has been incurred or paid is not a
reimbursement. In addition, a bona fide reimbursement arrangement does
not include an arrangement that is dependent solely upon an employee
certifying in advance that the employee will incur expenses at some
future date.
(b) Special rule for transit passes--(1) In general. The term
qualified transportation fringe includes cash reimbursement for transit
passes made under a bona fide reimbursement arrangement, but, in
accordance with section 132(f)(3), only if no voucher or similar item
that may be exchanged only for a transit pass is readily available for
direct distribution by the employer to employees. If a voucher is
readily available, the requirement that a voucher be distributed in-kind
by the employer is satisfied if the voucher is distributed by the
employer or by another person on behalf of the employer (for example, if
a transit operator credits amounts to the employee's fare card as a
result of payments made to the operator by the employer).
(2) Voucher or similar item. For purposes of the special rule in
paragraph (b) of this Q/A-16, a transit system voucher is an instrument
that may be purchased by employers from a voucher provider that is
accepted by one or more mass transit operators (e.g., train, subway, and
bus) in an area as fare media or in exchange for fare media. Thus, for
example, a transit pass that may be purchased by employers directly from
a voucher provider is a transit system voucher.
(3) Voucher provider. The term voucher provider means any person in
the trade or business of selling transit system vouchers to employers,
or any transit system or transit operator that sells vouchers to
employers for the purpose of direct distribution to employees. Thus, a
transit operator might or might not be a voucher provider. A voucher
provider is not, for example, a third-party employee benefits
administrator that administers a transit pass benefit program for an
employer using vouchers that the employer could obtain directly.
(4) Readily available. For purposes of this paragraph (b), a voucher
or similar item is readily available for direct distribution by the
employer to employees if and only if an employer can obtain it from a
voucher provider that--
(i) does not impose fare media charges that cause vouchers to not be
readily available as described in paragraph (b)(5) of this section; and
(ii) does not impose other restrictions that cause vouchers to not
be readily available as described in paragraph (b)(6) of this section.
(5) Fare media charges. For purposes of paragraph (b)(4) of this
section, fare media charges relate only to fees paid by the employer to
voucher providers for vouchers. The determination of whether obtaining a
voucher would result in fare media charges that cause vouchers to not be
readily available as described in this paragraph (b) is made with
respect to each transit system voucher. If more than one transit system
voucher is available for direct distribution to employees, the employer
must consider the fees imposed for the lowest cost monthly voucher for
purposes of determining whether the fees imposed by the voucher provider
satisfy this paragraph. However, if transit system vouchers for multiple
transit systems are required in an area to meet the transit needs of the
individual employees in that area, the employer has the option of
averaging the costs applied to each transit system voucher for purposes
of determining whether the fare media charges for transit system
vouchers satisfy this paragraph. Fare media charges are described in
this paragraph (b)(5), and therefore cause vouchers to not be readily
available, if and only if the average annual fare media charges that the
employer reasonably expects to incur for transit system vouchers
purchased from the voucher provider (disregarding reasonable and
customary delivery charges imposed by the voucher provider, e.g., not in
excess of $15) are more than 1 percent of the average annual value of
the vouchers for a transit system.
[[Page 587]]
(6) Other restrictions. For purposes of paragraph (b)(4) of this
section, restrictions that cause vouchers to not be readily available
are restrictions imposed by the voucher provider other than fare media
charges that effectively prevent the employer from obtaining vouchers
appropriate for distribution to employees. Examples of such restrictions
include--
(i) Advance purchase requirements. Advance purchase requirements
cause vouchers to not be readily available only if the voucher provider
does not offer vouchers at regular intervals or fails to provide the
voucher within a reasonable period after receiving payment for the
voucher. For example, a requirement that vouchers may be purchased only
once per year may effectively prevent an employer from obtaining
vouchers for distribution to employees. An advance purchase requirement
that vouchers be purchased not more frequently than monthly does not
effectively prevent the employer from obtaining vouchers for
distribution to employees.
(ii) Purchase quantity requirements. Purchase quantity requirements
cause vouchers to not be readily available if the voucher provider does
not offer vouchers in quantities that are reasonably appropriate to the
number of the employer's employees who use mass transportation (for
example, the voucher provider requires a $1,000 minimum purchase and the
employer seeks to purchase only $200 of vouchers).
(iii) Limitations on denominations of vouchers that are available.
If the voucher provider does not offer vouchers in denominations
appropriate for distribution to the employer's employees, vouchers are
not readily available. For example, vouchers provided in $5 increments
up to the monthly limit are appropriate for distribution to employees,
while vouchers available only in a denomination equal to the monthly
limit are not appropriate for distribution to employees if the amount of
the benefit provided to the employer's employees each month is normally
less than the monthly limit.
(7) Example. The following example illustrates the principles of
this paragraph (b):
Example. (i) Company C in City X sells mass transit vouchers to
employers in the metropolitan area of X in various denominations
appropriate for distribution to employees. Employers can purchase
vouchers monthly in reasonably appropriate quantities. Several different
bus, rail, van pool, and ferry operators service X, and a number of the
operators accept the vouchers either as fare media or in exchange for
fare media. To cover its operating expenses, C imposes on each voucher a
50 cents charge, plus a reasonable and customary $15 charge for delivery
of each order of vouchers. Employer M disburses vouchers purchased from
C to its employees who use operators that accept the vouchers and M
reasonably expects that $55 is the average value of the voucher it will
purchase from C for the next calendar year.
(ii) In this Example, vouchers for X are readily available for
direct distribution by the employer to employees because the expected
cost of the vouchers disbursed to M's employees for the next calendar
year is not more than 1 percent of the value of the vouchers (50 cents
divided by $55 equals 0.91 percent), the delivery charges are
disregarded because they are reasonable and customary, and there are no
other restrictions that cause the vouchers to not be readily available.
Thus, any reimbursement of mass transportation costs in X would not be a
qualified transportation fringe.
(c) Substantiation requirements. Employers that make cash
reimbursements must establish a bona fide reimbursement arrangement to
establish that their employees have, in fact, incurred expenses for
transportation in a commuter highway vehicle, transit passes, or
qualified parking. For purposes of section 132(f), whether cash
reimbursements are made under a bona fide reimbursement arrangement may
vary depending on the facts and circumstances, including the method or
methods of payment utilized within the mass transit system. The employer
must implement reasonable procedures to ensure that an amount equal to
the reimbursement was incurred for transportation in a commuter highway
vehicle, transit passes, or qualified parking. The expense must be
substantiated within a reasonable period of time. An expense
substantiated to the payor within 180 days after it has been paid will
be treated as having been substantiated within a reasonable period of
time. An employee certification at the
[[Page 588]]
time of reimbursement in either written or electronic form may be a
reasonable reimbursement procedure depending on the facts and
circumstances. Examples of reasonable reimbursement procedures are set
forth in paragraph (d) of this Q/A-16.
(d) Illustrations of reasonable reimbursement procedures. The
following are examples of reasonable reimbursement procedures for
purposes of paragraph (c) of this Q/A-16. In each case, the
reimbursement is made at or within a reasonable period after the end of
the events described in paragraphs (d)(1) through (d)(3) of this
section.
(1) An employee presents to the employer a parking expense receipt
for parking on or near the employer's business premises, the employee
certifies that the parking was used by the employee, and the employer
has no reason to doubt the employee's certification.
(2) An employee either submits a used time-sensitive transit pass
(such as a monthly pass) to the employer and certifies that he or she
purchased it or presents an unused or used transit pass to the employer
and certifies that he or she purchased it and the employee certifies
that he or she has not previously been reimbursed for the transit pass.
In both cases, the employer has no reason to doubt the employee's
certification.
(3) If a receipt is not provided in the ordinary course of business
(e.g., if the employee uses metered parking or if used transit passes
cannot be returned to the user), the employee certifies to the employer
the type and the amount of expenses incurred, and the employer has no
reason to doubt the employee's certification.
Q-17. May an employer provide nontaxable cash reimbursement under
section 132(f) for periods longer than one month?
A-17. (a) General rule. Yes. Qualified transportation fringes
include reimbursement to employees for costs incurred for transportation
in more than one month, provided the reimbursement for each month in the
period is calculated separately and does not exceed the applicable
statutory monthly limit for any month in the period. See Q/A-8 and 9 of
this section if the limit for a month is exceeded.
(b) Example. The following example illustrates the principles of
this Q/A-17:
Example. (i) Employee R pays $100 per month for qualified parking
used during the period from April 1 through June 30 of a year in which
the statutory monthly qualified parking limit is $175. After receiving
adequate substantiation from Employee R, R's employer reimburses R $300
in cash on June 30 of that year.
(ii) In this Example, because the value of the reimbursed expenses
for each month did not exceed the applicable statutory monthly limit,
the $300 reimbursement is excludable from R's wages for income and
employment tax purposes as a qualified transportation fringe.
Q-18. What are the substantiation requirements if an employer
distributes transit passes?
A-18. There are no substantiation requirements if the employer
distributes transit passes. Thus, an employer may distribute a transit
pass for each month with a value not more than the statutory monthly
limit without requiring any certification from the employee regarding
the use of the transit pass.
Q-19. May an employer choose to impose substantiation requirements
in addition to those described in this regulation?
A-19. Yes.
Q-20. How is the value of parking determined?
A-20. Section 1.61-21(b)(2) applies for purposes of determining the
value of parking.
Q-21. How do the qualified transportation fringe rules apply to van
pools?
A-21. (a) Van pools generally. Employer and employee-operated van
pools, as well as private or public transit-operated van pools, may
qualify as qualified transportation fringes. The value of van pool
benefits which are qualified transportation fringes may be excluded up
to the applicable statutory monthly limit for transportation in a
commuter highway vehicle and transit passes, less the value of any
transit passes provided by the employer for the month.
(b) Employer-operated van pools. The value of van pool
transportation provided by or for an employer to its employees is
excludable as a qualified transportation fringe, provided the van
[[Page 589]]
qualifies as a commuter highway vehicle as defined in section
132(f)(5)(B) and Q/A-2 of this section. A van pool is operated by or for
the employer if the employer purchases or leases vans to enable
employees to commute together or the employer contracts with and pays a
third party to provide the vans and some or all of the costs of
operating the vans, including maintenance, liability insurance and other
operating expenses.
(c) Employee-operated van pools. Cash reimbursement by an employer
to employees for expenses incurred for transportation in a van pool
operated by employees independent of their employer are excludable as
qualified transportation fringes, provided that the van qualifies as a
commuter highway vehicle as defined in section 132(f)(5)(B) and Q/A-2 of
this section. See Q/A-16 of this section for the rules governing cash
reimbursements.
(d) Private or public transit-operated van pool transit passes. The
qualified transportation fringe exclusion for transit passes is
available for travel in van pools owned and operated either by public
transit authorities or by any person in the business of transporting
persons for compensation or hire. In accordance with paragraph (b) of Q/
A-3 of this section, the van must seat at least 6 adults (excluding the
driver). See Q/A-16(b) and (c) of this section for a special rule for
cash reimbursement for transit passes and the substantiation
requirements for cash reimbursement.
(e) Value of van pool transportation benefits. Section 1.61-21(b)(2)
provides that the fair market value of a fringe benefit is based on all
the facts and circumstances. Alternatively, transportation in an
employer-provided commuter highway vehicle may be valued under the
automobile lease valuation rule in Sec. 1.61-21(d), the vehicle cents-
per-mile rule in Sec. 1.61-21(e), or the commuting valuation rule in
Sec. 1.61-21(f). If one of these special valuation rules is used, the
employer must use the same valuation rule to value the use of the
commuter highway vehicle by each employee who share the use. See
Sec. 1.61-21(c)(2)(i)(B).
(f) Qualified parking prime member. If an employee obtains a
qualified parking space as a result of membership in a car or van pool,
the applicable statutory monthly limit for qualified parking applies to
the individual to whom the parking space is assigned. This individual is
the prime member. In determining the tax consequences to the prime
member, the statutory monthly limit amounts of each car pool member may
not be combined. If the employer provides access to the space and the
space is not assigned to a particular individual, then the employer must
designate one of its employees as the prime member who will bear the tax
consequences. The employer may not designate more than one prime member
for a car or van pool during a month. The employer of the prime member
is responsible for including the value of the qualified parking in
excess of the statutory monthly limit in the prime member's wages for
income and employment tax purposes.
Q-22. What are the reporting and employment tax requirements for
qualified transportation fringes?
A-22. (a) Employment tax treatment generally. Qualified
transportation fringes not exceeding the applicable statutory monthly
limit described in Q/A-7 of this section are not wages for purposes of
the Federal Insurance Contributions Act (FICA), the Federal Unemployment
Tax Act (FUTA), and federal income tax withholding. Any amount by which
an employee elects to reduce compensation as provided in Q/A-11 of this
section is not subject to the FICA, the FUTA, and federal income tax
withholding. Qualified transportation fringes exceeding the applicable
statutory monthly limit described in Q/A-7 of this section are wages for
purposes of the FICA, the FUTA, and federal income tax withholding and
are reported on the employee's Form W-2, Wage and Tax Statement.
(b) Employment tax treatment of cash reimbursement exceeding monthly
limits. Cash reimbursement to employees (for example, cash reimbursement
for qualified parking) in excess of the applicable statutory monthly
limit under section 132(f) is treated as paid for employment tax
purposes when actually or constructively paid. See Secs. 31.3121(a)-
2(a), 31.3301-4, 31.3402(a)-1(b) of this
[[Page 590]]
chapter. Employers must report and deposit the amounts withheld in
addition to reporting and depositing other employment taxes. See Q/A-16
of this section for rules governing cash reimbursements.
(c) Noncash fringe benefits exceeding monthly limits. If the value
of noncash qualified transportation fringes exceeds the applicable
statutory monthly limit, the employer may elect, for purposes of the
FICA, the FUTA, and federal income tax withholding, to treat the noncash
taxable fringe benefits as paid on a pay period, quarterly, semi-annual,
annual, or other basis, provided that the benefits are treated as paid
no less frequently than annually.
Q-23. How does section 132(f) interact with other fringe benefit
rules?
A-23. For purposes of section 132, the terms working condition
fringe and de minimis fringe do not include any qualified transportation
fringe under section 132(f). If, however, an employer provides local
transportation other than transit passes (without any direct or indirect
compensation reduction election), the value of the benefit may be
excludable, either totally or partially, under fringe benefit rules
other than the qualified transportation fringe rules under section
132(f). See Secs. 1.132-6(d)(2)(i) (occasional local transportation
fare), 1.132-6(d)(2)(iii) (transportation provided under unusual
circumstances), and 1.61-21(k) (valuation of local transportation
provided to qualified employees). See also Q/A-4(b) of this section.
Q-24. May qualified transportation fringes be provided to
individuals who are partners, 2-percent shareholders of S-corporations,
or independent contractors?
A-24. (a) General rule. Section 132(f)(5)(E) states that self-
employed individuals who are employees within the meaning of section
401(c)(1) are not employees for purposes of section 132(f). Therefore,
individuals who are partners, sole proprietors, or other independent
contractors are not employees for purposes of section 132(f). In
addition, under section 1372(a), 2-percent shareholders of S
corporations are treated as partners for fringe benefit purposes. Thus,
an individual who is both a 2-percent shareholder of an S corporation
and a common law employee of that S corporation is not considered an
employee for purposes of section 132(f). However, while section 132(f)
does not apply to individuals who are partners, 2-percent shareholders
of S corporations, or independent contractors, other exclusions for
working condition and de minimis fringes may be available as described
in paragraphs (b) and (c) of this Q/A-24. See Secs. 1.132-1(b)(2) and
1.132-1(b)(4).
(b) Transit passes. The working condition and de minimis fringe
exclusions under section 132(a)(3) and (4) are available for transit
passes provided to individuals who are partners, 2-percent shareholders,
and independent contractors. For example, tokens or farecards provided
by a partnership to an individual who is a partner that enable the
partner to commute on a public transit system (not including privately-
operated van pools) are excludable from the partner's gross income if
the value of the tokens and farecards in any month does not exceed the
dollar amount specified in Sec. 1.132-6(d)(1). However, if the value of
a pass provided in a month exceeds the dollar amount specified in
Sec. 1.132-6(d)(1), the full value of the benefit provided (not merely
the amount in excess of the dollar amount specified in Sec. 1.132-
6(d)(1)) is includible in gross income.
(c) Parking. The working condition fringe rules under section 132(d)
do not apply to commuter parking. See Sec. 1.132-5(a)(1). However, the
de minimis fringe rules under section 132(e) are available for parking
provided to individuals who are partners, 2-percent shareholders, or
independent contractors that qualifies under the de minimis rules. See
Sec. 1.132-6(a) and (b).
(d) Example. The following example illustrates the principles of
this Q/A-24:
Example. (i) Individual G is a partner in partnership P. Individual
G commutes to and from G's office every day and parks free of charge in
P's lot.
(ii) In this Example, the value of the parking is not excluded under
section 132(f), but may be excluded under section 132(e) if the parking
is a de minimis fringe under Sec. 1.132-6.
Q-25. What is the effective date of this section?
[[Page 591]]
A-25. (a) Except as provided in paragraph (b) of this Q/A-25, this
section is applicable for employee taxable years beginning after
December 31, 2001. For this purpose, an employer may assume that the
employee taxable year is the calendar year.
(b) The last sentence of paragraph (b)(5) of Q/A-16 of this section
(relating to whether transit system vouchers for transit passes are
readily available) is applicable for employee taxable years beginning
after December 31, 2003. For this purpose, an employer may assume that
the employee taxable year is the calendar year.
[T.D. 8933, 66 FR 2244, Jan. 11, 2001; 66 FR 18190, Apr. 6, 2001]
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