TEA-21 Fringe Benefits

[Guest Sara]

It is my understanding that the Transportation Equity Act, signed in June 1998 and effective on January 1, 1999, permits employees to reduce their salaries in order to pay for transportation and parking expenses on a pre-tax basis.

Other than setting up something like an FSA, has anyone thought about how employers can let employees pay for these expenses on a pre-tax basis under the new law (hopefully, something that requires less bookkeeping)?

[Lisa Hand]

You might want to contact Data Path in Arkansas at 1-800-633-3841. They have software to administer a Section 132 benefit. Remember this benefit can not be run through a Section 125 plan.

[Guest ronc]

Virginia Commonwealth University and the Medical College of Virginia Hospitals Authority will begin a pre-tax parking program 12/1 and 1/1 respectively. Contact Ron Croy 804-628-7011 for more info.

[This message has been edited by ronc (edited 10-21-98).]

[Guest kp]

I have the same issue. Is anyone setting the parking benefit up like a dependent care account where the employees project how much they will use during the year, the amount is spread during the year as fixed deductions each payroll, and then the employees are reimbursed as they submit receipts. There is no "use it or lose it" feature, so if money is left over at the end of the year for which the employee did not use for parking, what happens? Is it given back to the employee as taxable income? Any other tax or adminstrative implications?

[Guest kp]

I just noticed that the value of the monthly parking must be calculated on a monthly basis to determine whether the value of the benefit exceeds the limit for the month. In other words, if the value of the benefit does not exceed the statutory limit in any month, the unused poirtion of the exclusion may not be carried over to subsequent months.

[Guest Do]

I don’t see why a qualified transportation fringe benefit (QTFB) has to be set up like a cafeteria plan. I think it can be set be set up like a cafeteria plan, but I don’t see anything in TEA-21, or 132(f) that requires it. There may be two methods of implementing reimbursements of QTFBs.

First method is already mentioned the cafeteria-like method. If an employee elects to contribute the maximum amount on a before tax basis each month, the employee may be reimbursed each month or at any time of the year. Theoretically, an employee should be able to receive a reimbursement for a complete year so long as the reimbursement amount does not exceed the monthly maximum. In other words, if, in the end of December, an employee wants to be reimbursed for the QTFB parking, he or she may receive a reimbursement of $1,860 (which is $155 times 12). Therefore, I believe unused contributions can be carried over to subsequent months. As of December, any unused portion should be paid to the employee as income so that it is included in his or her W-2. I believe this is allowed under Notice 94-3, which is guidance on 132(f) before TEA-21.

The second method is a reduction of taxable gross pay method. Anytime during the year, an employee may ask for reimbursement of QTFBs. The employee is reimbursed by reducing his or her taxable income by the amount of the QTFB. For instance, if an employee’s gross pay is $3,000 a month and wants to be reimbursed for QTFB parking, his or her gross pay would be reduced by $155 to $2,845. The employee would receive net pay plus $155. Net pay would be $2,845 less employment tax, income withholding, 401(k) deferrals, cafeteria contribution, etc. Any QTFB will affect 401(k) deferral and if an employees retirement benefit is percentage of W-2 compensation, his or her retirement benefit will be affected. I know this method seems too good to be true (which in my experience means it is), but then again: (i) I cannot find a rule prohibiting it and (ii) TEA-21 wasn’t written by tax people. Does anyone think I’m stretching it too far with option 2.

I have a question of transit pass QTFBs. Transit pass QTFBs are allowed as a reimbursement program if, and only if, voucher system is not “readily available.” Notice 94-3 defines vouchers as “readily available” if (i) they are available on terms no less favorable than those to an individual employee and (ii) without incurring a significant administrative cost. In my city, we have Commuter Checks which cost 2.5% of the value of the Commuter Check. It seems to me that 2.5% is not a significant administrative cost. However, in terms of dollars, if the number of employees who participate in transit pass QTFBs is high, then the cost can become very high and significant. Am I stretching it too far by viewing administrative costs in dollars, rather than percentages, in determining whether it is significant.

[Guest kp]

Regarding your first method, I agree that EEs may be reimbursed for any amount of pretax parking dollars deducted in excess of the expense they incur for any one month. The reimbursement would be taxable to the EE. I disagree that the unused portion up to the statutory monthly limit may be carried over to subsequent months. See Not.94-3, Q-2(f). For example, EE incurs $160 parking expense in January. EE may not carry over the $15 excess to February. ($175 monthly max - $160).

Regarding your second method, are you proposing that a pretax deduction for parking can occur simultaneously with the same dollar reimbursement to net pay (or reimbursements to net pay may occur later too.)? If so, I agree with this proposal for parking. I'm not sure what you are trying to point out about the retirement deferrals that are a percentage of gross. The pretax parking dollars should not affect computation of, say, a 401(k) ten percent election. Ten percent will still be calculated on top gross before the parking pretax deduction is even considered. For example, EE has $100 gross, $20 pretax parking deduction, and 10% 401(k) election. Taxable gross would be only on $70 ($20 + 10). The 401(k) deduction would be $10 with or without the presence of the parking pretax deduction because the percentage is calculated on the gross $100, not some reduced amount.

Regarding your last comment, what is considered a "significant administrative cost" is yet to be seen. See Not. 94-3, Q-3©. The 1994 IRS Notice is still good guidance (minus the comments about no "in lieu of compensation" benefits). According to William Menczer of the Federal Transit Administration, the IRS will come out with more guidance in this area. Until it does, it most likely will provide some leeway as long as there is no blatent circumvention of the intent of the law. See www.fta.dot/gov/office/public and select the Colleague letters on TEA-21. Mr. Menczer said that ther reason the IRS imposes this voucher requirement is to ease the administrative burden on the employer. Why the government chose to do this with transit and not parking is unclear. (Perhaps the IRS envisioned auditing thousands of tiny metro tickets.) My guess is you will have to use the transit voucher system in your area. As an aside, query the transit system that provides monthly and weekly vouchers, but not daily. Would the absence of a daily voucher mean that transit for daily travel is not "readily available?"

Please respond if you disagree with any of my contentions. I think this new benefit is interesting because it acts like a cafeteria plan benefit without the forfeiture restrictions.

[Guest Do]

I apologize for not responding sooner. I’ll try to make this brief; but, I don’t expect succeed. I hope I don’t seem curt.

In response to your paragraph (1):

I wasn’t saying EEs may be reimbursed for any amount in excess the “monthly statutory exclusion limit.” The monthly statutory exclusion limit is the $65 for transit, $65 for vanpooling and $155 for parking (effective 1/1999). I agree any excess would be taxable. Also, I was not saying that unused portion of a monthly statutory exclusion limit may be carried over. The scenario, under the cafeteria method, that I visualize goes something like this: In December 1998, EE elects to have $65 of her/his monthly pre-tax compensation deducted for QTFBs. In February 1999, s/he certifies (which is a separate issue) that s/he had incurred at least $65 of commuting transit expense in January and requests a reimbursement of $65. Alternatively, in June 1999, s/he may certify and request reimbursement for commuting transit expenses from January to May, $325. In December 1999, she may certify and request reimbursement for the whole year, $780. In each case, the reimbursed amount is within the monthly statutory exclusion limit. Therefore, what I am saying is that an unused EE contribution may be carried over; I am not saying the same for unused monthly statutory exclusion limits. If in December, the EE wants to be reimbursed for 11½ months, instead of 12 months because s/he only commuted 11½ months (for example, s/he went on vacation for two weeks and didn’t commute). If s/he had set aside $780 and only incurred $747.50, s/he should be reimbursed for $747.50 (untaxed) and $32.50 (taxed).

In response to your paragraph (2):

To clear up the confusion in the cafeteria method, I needed to make a distinction between “EE contribution” and “monthly statutory exclusion limit.” In the non-cafeteria method I need to make a distinction between “gross pay” and “taxable gross pay.” Here’s what I visualize under the non-cafeteria method: There is no pre-election form because there is nothing to set aside. In February 1999, EE certifies and requests reimbursement for $65 of commuting transit expenses incurred in January. EE’s monthly “gross pay” is $3000. EE’s February “taxable gross pay” is $3000 minus $65 QTFB, 401(k) deferral, and §125 contribution. EE’s February net pay is her/his “taxable gross pay” less taxes and withholding on “taxable gross pay” plus $65 QTFB. Furthermore, EE may request reimbursement for a whole year in December 1999 where her/his December “taxable gross pay” would be $3000 minus $780 QTFB, 401(k) deferral and §125 contribution. EE’s December net pay is her/his “taxable gross pay” less taxes and withholding on “taxable gross pay” plus $780 QTFB.

More in response to your paragraph (2):

I agree that QTFB would not affect the EE’s 401(k) deferral. However, if the EE participates in a profit sharing plan that allocates contributions by a prorata W-2 compensation formula, QTFBs will affect her/his allocation. If QTFBs are added back in to qualified plan’s definition of compensation, it may affect the plan’s ability to satisfy 414(s). The 1998 Blue Book states that the Treas. Regs will treat QTFBs as other salary reduction contributions for 415 limits and may be added back as remuneration. A technical correction to TEA-21 may be sought.

In response to paragraph (3):

I’m leaving it up to the client to make the call. Any guidance from the Treasury, I’ll bet, will say that “significant” will be judged on facts and circumstances. I don’t expect a bright line. I think there are other costs in addition to the 2.5%. There are personnel costs, the cost of having to buy vouchers in advance, cost of storing and protecting vouchers, cost of delivering vouchers to EEs or of EEs picking up vouchers. There will be costs with a non-voucher system and they too may be significant. If the costs of both the voucher and the non-voucher systems are significant, query whether the employer can choose which system to implement when the voucher system is cheaper. Also, query whether comparing the voucher to the transit pass is an acceptable comparison when determining whether vouchers are available to employers on terms no less favorable than those to an individual EE because vouchers cost 2.5% more than the actual transit pass. I think the absence of a voucher for a daily transit pass when daily transit passes are available to EEs would mean transit passes are not readily available because the term of availability is less favorable to the employer. It would seem impractical to require vouchers for monthly or weekly passes but allow cash reimbursements for daily passes. That would result in a two-system program (vouchers and non-vouchers). This would seem to be the most expensive alternative and contrary to the public policy of TEA-21.

In response to paragraph (4):

I find this interesting too and am shocked at how remarkably complex it can be to implement. As I described above, I don’t see why it has to act like a cafeteria plan without forfeitures because a before election isn’t required by what the statute says. The non-cafeteria method it seems would be the only way a retroactive effective date (to 1/1/98) makes sense.

[Guest Do]

Generally, once income is set apart for EE, he or she is deemed to have constructively received the income. If EE has the choice of receiving his or her income as a taxable benefit and nontaxable benefits, he would be deemed to have constructively receipt of the taxable benefit. Therefore, there is no real choice, he or she is going to get taxed. The nontaxable feature of the nontaxable benefit will be lost. For QTFBs, 132(f)(4) prevents this choice from creating constructive receipt of the taxable compensation. Likewise in the cash-out situation, 132(f)(4) prevents the choice from being constructive receipt of the cash. I don’t think there is a causal connection between this being an non-issue (and I am not saying it is a non-issue) and deductions not carrying over to a subsequent calendar year. It’s my thought that deductions aren’t carried over to a subsequent calendar year because ER needs to figure out EE’s W-2 on a calendar year basis. I’ll have to confess, I don’t see the relevance of deductions not carrying over. Help me out. Anyone. This means you, passive reader. Do.

(I thought I was putting the pieces together; now I’m not sure again.)

[Guest kp]

Thanks for your response to my posting and for clarifying your comments. I think that overall, we agree on the tax treatment of these new benefits. I expect that the transportation benefits will be very attractive to employers since it seems to be a "win-win" situation -- at least tax wise. I also agree that the calls will be made on a case-by-case basis, and only time and rulings will help form the guidance.

I agree with your proposed two methods in administering QTFBs. The choice may depend on the administrative preferences. I agree with your assertion that the QTFBs do not have to act like a cafeteria plan since no forfeiture issue exists. Employers may want to have the employee make annual pretax elections for administrative ease -- not for tax reasons. The situations will vary depending on the type of employer and parking or transit available. In one example, employees of a large company have monthly parking with costs that remain fairly consistent. It easier for payroll to take the QTFB pretax deduction and reimburse automatically (substantiation issues aside). In another example, parking is erratic for employees of a small employer. Some pay for parking on a daily basis, some pay monthly, some ride the transit. In that case the non-cafeteria method is more feasible. Either way, the substantiation of expenses is the biggest administrative burden.

I may be overanalyzing the next issue. How would you or anyone else address any constructive receipt issues? My peripheral understanding of constructive receipt is the following: no constructive receipt exists where nontaxable benefits are elected in lieu of taxable benefits. The benefits will be treated as nontaxable if the election is made before the taxable benefits become currently available. Is this a non-issue since pretax deductions do not carry over into a subsequent calendar year? What about the QTFB parking or transit benefit "cash out" situation where the employee forgoes the pretax benefit and elects to take the taxable cash value of the benefit?

Any thoughts?