Pre-tax Transit Issues

[oriecat]

I am setting up a transportation fringe program so my employees can pay for their bus passes with pre-tax dollars. We will sell the items to employees at a 7% discount (giving them back most of our FICA savings), so we are essentially just breaking even (excluding the cost of my time to administer, which won't be much, we're only talking about a handful of employees.)

I looked over a lot of the old discussions, and I do not want to set this up like a section 125. I just want to deal with it each month, when they need a pass or voucher, they sign an authorization for it and I give it to them.

In one of my localities, I can get passes on consignment, so then we would just deduct the discounted amount pretax and then we pay for the pass.

In another localitiy, we have to buy vouchers, which the employee would use to buy their pass. Again we would just deduct the discounted amount pretax. We already paid for the vouchers, so this would pay us back for what we already put out.

I think both of those situations are correct, but of course would love to hear if you see a problem with it.

Now I have another locality where I do not think I can get passes or vouchers. So I am trying to wrap my head around how to deal with that so that it would equate with the others. If the pass is $28, then it seems like I would need to reimburse the employee the entire $28, which would be nontaxable, since its an excludable fringe, and then the employee would pay us back the discounted amount pretax. But that seems like double dipping somehow. Does that sound right, or is that an allowable way to deal with it? I think I am thinking about this too much...

Thank you for any thoughts on this.

[GBurns]

I think that you should clarify your last scenario and rearrange the sequence of event, otherwise at first glance it looks like the double dipping transit schemes that the IRS is shutting down.

If you have subscription to EBIA there was quite a lot of good coverage in 2002.

For any employee contributions you will have to set it up like a 125.

In all the scenarios that you posted, including the last, the employee should pre-tax their portion, which if not sufficient would have an added non-taxable employer contribution, then the passes are purchased by the employer for the employee. Just like with health insurance.

If you do it as needed, it would not be a prospective election and would look just like the old outlawed zero balance medical expense reimbursement plans. In the eyes of the IRS an improper re-characterization of income.

There is some good literature available from the big MTAs and the big transit pass providers.