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Qualified Transportation Plans — Re-Evaluating Cash Reimbursement of Transit Passes/Vouchers for 2004
Treasury Regulations governing qualified transportation plans prohibit employers from offering cash reimbursement for transit passes or vouchers, when such passes/vouchers are "readily available" for direct distribution by the employer to its employees. Under current guidance, passes/vouchers are not "readily available" if the provider of these items imposes certain non-financial and/or financial restrictions on obtaining them. Effective January 1, 2004, the rule regarding what constitutes a financial restriction will change. Employers currently offering cash reimbursement of transit passes/vouchers should be aware of this change and how it may affect the administration of their qualified transportation plan.
The rules governing non-financial restrictions were effective January 1, 2002 and cover situations where the provider imposes any one of the following restrictions: 1) unreasonable advance purchase requirements, 2) unreasonable purchase quantity requirements, and 3) inappropriate limits on denominations that are available for purchase. When any of these restrictions are present, the vouchers are not considered "readily available" and an employer may offer cash reimbursement rather than distribute transit passes/vouchers.
Current guidance on financial restrictions is in the form of IRS Notice 94-3. In this Notice, transit passes are considered readily available "if the employer can obtain them on terms no less favorable than those available to an individual employee and without incurring a 'significant administrative cost.'" What constitutes a "significant administrative cost" is not clearly defined. Typically employers have looked at internal administration, as well as the provider's charges in making this subjective determination.
As of January 1, 2004 employers should test for ready availability using the 1% rule as set forth in Treasury Regulation 1.132-9,Q/A-16(b)(5) . Under this rule, 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 not more than 1% of the average annual value of the vouchers for the transit system," the vouchers/passes are "readily available" and cash reimbursement is not permitted. Only costs from the provider can be considered in making this determination and special rules apply where there are multiple voucher providers or multiple transit systems. Since transit pass/voucher providers typically structure their fees to fall within this 1% threshold, cash reimbursement arrangements are less likely to be a viable alternative to transit pass/voucher distribution a after January 1.
Employer are urged to reevaluate their current qualified transportation plans to make sure they are in compliance, or come into compliance as of January 1, 2004. When determining if the 1% threshold has been satisfied, employers dealing with multiple voucher providers or multiple transit systems should consult with their administrator for additional rules to follow in making this determination. Employer currently offering cash reimbursement may find they need to distribute vouchers/passes if they wish to keep the transit pass portion of their plan in place.
It is worth noting that some debit card providers have taken the position that the debit card can operate as a voucher (the IRS has also informally indicated this may be valid), thus eliminating the need for the employer to order and store passes and vouchers which are typically negotiable and need to be handled as cash. Questions in this regard should be posed to your administrator or debit card provider.