December 18, 2015
Good News – Higher Contribution Limits for Mass Transit Users!
A provision included in the Protecting Americans From Tax Hikes Act of 2015* will establish permanent parity between the monthly benefit limits for mass transit and parking expenses for commuters. For the past two years, the monthly maximum that an employee could set aside on a pretax basis for work-related mass transit expenses was much lower than for parking reimbursement (Only $130 for transit vs. $250 for parking in 2015). Now the maximum benefit amount that can be received is equal. The maximum benefit amount is indexed annually. In 2016 an employee may set aside up to $255 for either type of commuter expense. Technically, the new level is also retroactive to the start of 2015, but unlike tax credits you can claim on your tax return for expenses in the prior year, there’s no way for most commuters to realistically take advantage of it for months already passed.
This is great news for consumers. Especially in larger metropolitan areas where monthly commuter passes cost much more than $130. The administrative complexity of combining pretax and post-tax contributions to buy a pass was almost a dis-incentive to offer transit benefits. Now employees can enjoy greater tax savings by using pretax dollars for their transit expenses, plus greater ease of use.
* As of 12/18/15, the Act has passed in the House and Senate and is expected to be signed into law on Monday, December 21, 2015.
Not so Good News – Higher Scrutiny of How Mass Transit Benefits Are Provided.
In the past year, several larger metropolitan areas have passed ordinances requiring employers to provide pretax commuter benefits. Perhaps we can thank this movement for restoring the transit benefit parity discussed above. But with that comes elevated scrutiny of these employer-provided benefits to make sure they are administered according to the regulations. As a result IRS officials have reiterated their “no reimbursement” rules for mass transit, and clarified whether a stored value debit card can or cannot be used for mass transit. These rules will be strictly enforced after 2015. Our summary is below:
If You Drive and Park
This is simple and straightforward: Employers may provide this benefit through a bona-fide reimbursement program (adjudication of submitted expense documentation) or allow participants to access their transit funds through use of a debit card that is restricted to locations that have Merchant Category codes that are for parking expenses.
If You Use Mass Transit
Direct reimbursement of transit passes is not allowed per IRS regulations, except under very limited conditions where a transit voucher is not considered “readily available”. Those conditions are so uncommon that we will not address them in this bulletin.
This leaves employers who want to offer transit benefits two compliant options: purchase and distribute the transit passes directly to participants (which is so administratively cumbersome as to not be an option), or provide a voucher or similar item that may only be exchanged for a transit pass.
Enter the debit card as a means to provide transit benefits (or “vouchers” in IRS-speak). But it can’t be just any stored-value card. The card used to purchase transit fare must have some pretty specific restrictions.
- Can MCC-Restricted Debit Cards Be Vouchers? Usually not. An electronic payment card for tax favored benefits places restrictions on how funds can be used by merchant category code (MCC). The card will only work where the MCC matches the qualified expense (e.g. fare media).But under the regs, if the card cannot further restrict what can be purchased at that merchant so it blocks all purchases except transit fare, it is not a voucher. And that ability to restrict is not universally available, because so many locations sell items other than fare (incidentals like gum, snacks, etc.), so an MCC restricted card typically no longer meets the criteria of a voucher. In Rev. Rul. 2014-32, the IRS concluded that terminal-restricted debit cards had become so widely available and used that, beginning after December 31, 2015, employers would no longer be able to provide cash reimbursements or other means of purchase other than a terminal-restricted debit card.
- Terminal-Restricted Debit Cards are considered a “voucher” and are described by Revenue Ruling 2014-32 as “debit cards that are restricted for use only at merchant terminals at points of sale at which only fare media for local transit systems is sold.” Meaning, only at the specific kiosk, terminal or online portal that sells only transit passes.
NEO provides administration services for parking and transit benefits. We offer parking through a reimbursement process or on our Benny® debit card. Transit is available only through the terminal-restricted Benny® card. If you have any questions about the new increased transit limits, or how the card will work for your plan in 2016, please contact your client service manager.