Originally posted November 25, 2014 by Dan Cook on BenefitsPro.com

Human resources managers will want to study several new IRS rulings on non-cash benefits to commuting employees. The IRS has delved deeply into various systems for assisting workers withcommuting costs with the intention of determining whether these forms of assistance should be included in the employees’ gross income.

In essence, the IRS is examining a transition from paper transit vouchers to virtual vouchers. The conundrum here has to do with the media itself. The paper transit vouchers of old were handed out (or paid for) by employers, and employees could only use them for mass transit purposes. While some were perhaps using them for personal travel as well, the system itself was a simple one.

With the advent of smartcards and debit cards as transit pass replacements for the paper tickets, the system became more complex. In a new notice, the IRS lays out which transactions it will include in employee gross income, and which will be excluded. Key factors include how strict the rules are for limiting the smart/debit card purchases to transit only.

As the IRS points out, some employers have developed arrangements that permit employees to use their company cards for purchases other than bus and train tickets. These the IRS frowns upon. Better are the arrangements where the employer:

  • Issues a card connected to a provider that only sells transit tickers;
  • Requires employees to make some sort of verification or certification that they are using the card for work-related transportation only;
  • Reimburses employees for card use rather than pays them ahead of use;
  • Restricts reimbursement to the IRS’s monthly ceiling levels.

In its missive, the IRS offered eight examples of different employer-employee transit assistance arrangements. In two of the eight cases, the IRS ruled the “income” will not be excluded from employees’ gross income for tax purposes. The full content of the advisory and ruling is worth reading for those HR managers trusted with implementing a reimbursement plan for commuting employees.