Guest Article

(From the November 11, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

IRS Information Letters Address Issues Relating to Qualified Transportation Fringe Benefits

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Is car pooling a qualified transportation fringe benefit? What about parking for motorcycles and other single-occupancy vehicles? The IRS analyzes these questions in two information letters that have recently been made public. INFO 2002-0113 (September 30, 2002) and INFO 2002-0117 (September 30, 2002).

Although these information letters do not break new legal ground, they do highlight issues that other employers may be dealing with. Furthermore, they provide some insight into how the IRS interprets IRC section 132(f) and the related regulations (Treas. Reg. Sec. 1.132-9), which were issued in January 2001.

Qualified Transportation Fringe Benefits-- The Basics

In general, IRC section 132(f) permits employers to provide their employees with "qualified transportation fringe benefits" on a tax-free basis, subject to certain limits. The Code defines "qualified transportation fringe" as--

transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee's residence and place of employment; any transit pass; and qualified parking.

The aggregate limit on commuter highway vehicles and transit passes is $100 per month. The limit on qualified parking is $185 per month for 2002, and $190 per month for 2003.

Is Car Pooling a Qualified Transportation Fringe Benefit?

The first letter (INFO 2002-0113) was requested by a taxpayer who uses a car pool to travel to and from work. The question is whether the taxpayer can use his employer's qualified transportation fringe benefit program to pay car pooling expenses with pretax dollars. As a general matter, the information letter suggests car pooling arrangements will not satisfy the requirements of section 132(f), but certain van pooling arrangements may meet the relevant requirements.

According to the information letter, the key issue is whether the car qualifies as a "commuter highway vehicle." If not, the information letter confirms that IRC section 132(f) does not apply.

According to IRC section 132(f)(5)(B), a "commuter highway vehicle" is any highway vehicle:

with a seating capacity of a minimum of six adults, excluding the driver; and having 80 percent of its mileage used for (1) transporting employees who travel between their residences and place of employment, and (2) transporting at least half of the vehicle's adult seating capacity, excluding the driver (e.g., in a six passenger vehicle, at least three adult passengers and the driver must be traveling in the vehicle).

Obviously, most cars are not big enough to qualify as commuter highway vehicles. Larger vehicles, such as vans, are more likely to satisfy these requirements. As a result, the information letter continues by talking only about van pools.

What About Van Pools?

Section 132(f) applies to van pooling arrangements if the van pool vehicle is a commuter highway vehicle. However, the way in which the employer can provide the benefit to employees depends on whether the van pool is operated by the employer, the employee, or by a public or private transit company.

If the van pool is employer-operated, then the employee is not taxed on the value of the employer-provided benefit, subject to the $100 per month limit. (Remember, this $100 per month limit is an aggregate limit, and must be reduced by the value of any employer-provided transit passes.) The van pool is employer-operated if the employer buys or leases the van to enable employees to commute to and from work, or hires a third party to provide this service.

If the van pool is employee-operated (i.e., operated by employees independent of the employer), the employer can reimburse the taxpayer for the costs associated with the arrangement, again subject to the $100 per month limit. The reimbursement generally will come from an account that the employee funds with pre-tax salary reduction contributions. However, the expenses must be substantiated before reimbursement can be made. [In order to comply with this requirement, the employer must establish a bona fide reimbursement arrangement. See Treas. Reg. Sec. 1.132-9(b), Q/A 16(c).)]

Things become a little stickier if the van pool is operated by a public or private company. In this case, instead of simply reimbursing employees for their fare cost, the employer generally must distribute vouchers (or similar items) directly to employees, who can exchange them for fare cards, passes, etc. If (and only if) such vouchers are not "readily available" can the employer simply reimburse employees for their fare costs. [Treas. Reg. Sec. 1.132-9(b), Q/A 16(b)(4) provides rules for determining if vouchers are readily available.] Of course, the $100 per month aggregate limit applies in this situation, as well.

Does Qualified Parking Include Parking for Single-Occupancy Vehicles?

The second information letter (INFO 2002-0117) deals with the definition of "qualified parking" for purposes of IRC section 132(f). Specifically, the issue is whether employees can use pre-tax salary reduction contributions to pay for parking a single-occupancy vehicle (such as a motorcycle) at or near an employer's place of business.

According to the information letter, qualified parking "means parking provided to an employee on or near the employer's business premises OR on or near the location from which the employee commutes to work by transportation by mass transit, commuter highway vehicle, car pool, or by a person in the business of transporting persons for compensation or hire." See IRC section 132(f)(5)(C) and Treas. Reg. Sec. 1.132-9(b), Q/A 4. This does not include any parking on or near the employee's residence.

The information letter clarifies that "qualified parking is not limited to multiple-occupancy vehicles but may include single-occupancy vehicles as long as the Code and regulation requirements are met." In other words, the type of vehicle does not matter so much as where it is being parked.

The information letter goes on to discuss some of the requirements for allowing employees to make pre-tax salary reductions under section 132(f). Specifically, the information letter reiterates that the employee must make the compensation reduction election before he or she is currently able to receive cash or other taxable compensation, and that the election must specify the period for which the qualified transportation fringe benefit will be provided. (Note this period cannot begin before the election is made.) See Treas. Reg. Sec. 1.132-9(b), Q/A 14.

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The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2002, Deloitte.

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