Cash for malfunctioning transit cards is taxable wages

Plain-English summary

IRS Chief Counsel advised that restricted transit debit cards qualified as transit passes under section 132(f). Limited cash reimbursements could qualify when a transit provider's enrollment or issuance delays made a functioning pass unavailable for distribution to a new or returning seasonal employee, provided the substantiation rules were met. Once a valid card had been distributed, however, later card or reader malfunctions did not make the pass unavailable to the employer. Cash reimbursements for transit costs caused by those malfunctions were taxable employee income and wages subject to FICA, FUTA, and income-tax withholding.

Ruling snapshot

• Question: Are cash reimbursements for transit costs caused by delayed or malfunctioning transit cards qualified transportation fringe benefits?
• Outcome: Advice: limited provider-caused issuance delays may qualify, but reimbursements for malfunctions after distribution are taxable wages.
• Key authorities: IRC § 132(f); Treas. Reg. § 1.132-9(b); Rev. Rul. 2014-32.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201949019
       Release Date: 12/6/2019
       CC:EEE:EOET:ET2:MZhidkov
       PRESP-111341-19

UILC: 132.10-00

date: August 14, 2019

 to:   ----------------------
       ------------------------------------------
       -----------------------------------------------------
       ------------------------------

from: Lynne Camillo
Branch Chief, Employment Tax Branch 2
Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and
Employment Taxes) CC:EEE:EOET:ET2

subject: Taxability of cash reimbursements for malfunctioning transit passes

       This is in response to your question concerning the taxability of certain cash
       reimbursements by the ------------------------------------------ for transit benefits under the ----
       ------------------------------------------program. For the reasons stated below, for newly hired
       or returning seasonal transit pass (---------------------------------) users, we think that cash
       reimbursements may be, under appropriate circumstances, properly viewed as a
       qualified transportation fringe under section 132(f). However, any cash reimbursements
       for transit pass users with malfunctioning cards are not qualified transportation fringe
       benefits, are included in the employees’ income, and are included in wages subject to
       FICA, FUTA, and income tax withholding.

       Revenue Ruling 2014-32, 2014-2 C.B. 917, provides guidance on the use of
       smartcards, debit or credit cards, or other electronic media to provide qualified
       transportation fringe benefits to employees. MCC-restricted debit cards constitute
       "transit passes" within the meaning of section 132(f)(5)(A) and Treas. Reg. § 1.132-9(b),
       Q/A-3 as long as the value stored on the cards is usable only as fare media for transit
       systems or to purchase only fare media for transit systems. Both the ----------------- debit
       card and the ------------- card constitute "transit passes" within the meaning of section
       132(f)(5)(A) and Treas. Reg. § 1.132-9(b) Q/A-3 because the value stored on the cards

PRESP-111341-19 2

is usable only as fare media for transit systems or to purchase fare media for transit
systems.

The ------is required to use the ----------------- debit card and the ------------- card in lieu of
cash reimbursement to provide transit benefits to its employees as long as the ------------
card and the ----------------- debit card are readily available within the meaning of section
132(f)(3) and Treas. Reg. § 1.132-9(b) Q/A-16(b). Treas. Reg. § 1.132-9(b) Q/A-
16(b)(4) and (b)(6) provide that a voucher or similar item is “readily available” for direct
distribution by the employer to employees if and only if the employer can obtain it from a
provider that does not impose “restrictions” that “effectively prevent the employer from
obtaining vouchers for distribution to employees.” Examples of nonfinancial restrictions
that effectively prevent the employer from obtaining vouchers appropriate for distribution
to employees include advance purchase requirements, purchase quantity requirements,
and limitations on denominations of vouchers that are available. See Treas. Reg. §
1.132-9(b) Q/A-16(b)(5) and (b)(6). Treas. Reg. § 1.132-9(b) Q/A-16 and the language
in section 132(f)(3) are focused on the availability of vouchers to the employer for
distribution to employees, not subsequent use by the employee once they are
distributed. See also 66 FR 2241-01 (2001) (stating that the proposed regulations
under section 132(f) focused on an employer’s administrative costs relating only to fees
paid to fare media providers in determining whether transit passes were readily
available. However, nonfinancial restrictions causing a voucher or similar item not to be
readily available were added to the final regulations in response to commentators
representing employers). Thus, if the relevant transit system imposes timing delays on
the purchase or distribution of transit passes because of the transit system’s agreement
with the employer, this may be viewed as a restriction that effectively makes the
vouchers or transit passes not readily available to the employer for distribution to
employees.

Voucher providers may impose a timing delay on the purchase of transit passes by the -
------for its employees’ use. For example, the voucher provider may require the ------to
only enroll new participants on a certain day of the month. Similarly, voucher providers
may require a certain amount of time to prepare and issue a voucher/debit card to new
employees and this may prevent the ------from providing the voucher to the employee
immediately when the employee begins work. It’s possible that other circumstances
may exist under which the voucher provider delays the provision of a transit pass to the
------for providing to its employees. Under these limited circumstances, provided that
the substantiation procedures in Treas. Reg. § 1.132-9(b), Q/A-16(c) are satisfied, the --
----- may provide qualified transportation fringe benefits through cash reimbursements.

However, when an employer provides a ----------------or ------------- card to the employee,
the benefit is considered provided.1 Accordingly, malfunctions in the card (e.g., chip
1
If the ---------------or ------------- card provided to the employer by the voucher provider (and subsequently
distributed by the employer to the employee) is not a functioning card, thereby creating a delay caused by the
voucher provider in the distribution of a functioning card, we believe that situation may also be acceptably viewed
as one in which the transit pass or voucher was not readily available for distribution. Accordingly, provided that
PRESP-111341-19 3

stops working) or malfunctions in the system reading the card (e.g., card reader goes
down during commute) do not mean that the transit pass was not readily available to the
employer for distribution within the meaning of section 132(f)(3). One would expect in
these circumstances that the employee would contact the transportation provider to
have the malfunction remedied or to provide the transportation. Since the employee has
a valid card, it would be the transportation system’s responsibility to honor the card and
address possible technical malfunctions. The card need only entitle the employee to the
benefit, and there is no requirement in the Code and its regulations that the employee
ultimately avail him or herself of the transit benefit or that the benefit be available at any
time for the employee’s use. For example, if an employee missed the van pool and was
not able to recuperate the lost trip, the voucher for the van pool rides would still have
been provided.2 Thus, cash reimbursements for expenses incurred in the use of transit
due to malfunctioning cards or systems are not qualified transportation fringe benefits,
and the value of any cash reimbursements provided for such expenses is included in
the employee's income and is included in wages subject to FICA, FUTA, and income tax
withholding.

Please call (202) 317-4774 if you have any further questions.

the substantiation procedures in Treas. Reg. § 1.132-9(b), Q/A-16(c) are satisfied, the -----may provide qualified
transportation fringe benefits through cash reimbursements.
2
We do note, however, that the benefits on the card will often remain available for subsequent use, at least within
a certain time period.