Key Points
- Generally, unused compensation reduction amounts under an employer’s qualified transportation plan may be carried over to subsequent years for future commuting expenses.
- Cash reimbursements that may be used for any purpose are not allowed.
- IRS rules do not permit unused transportation benefits to be transferred to a health FSA under a cafeteria plan.
An employee may receive a cash reimbursement only as reimbursement of transportation benefits and not for any other fringe.
On March 25, 2022, the IRS issued an information letter to explain that taxpayers cannot transfer unused amounts in a commuter benefits plan (CBP) to a health flexible spending arrangement (FSA). The IRS issued the information letter in response to a taxpayer who had unused amounts in his employer’s CBP because his employer decided that he could work from home permanently due to COVID-19.
Options for Transportation Benefits
Employers who provide transportation benefits to employees can exclude the benefit from an employee’s gross income if it is a “qualified transportation fringe” under the tax code. A qualified transportation fringe includes travel in a commuter highway vehicle between home and work, any transit pass, and qualified parking.
The tax code allows employers to offer a choice between cash compensation and any qualified transportation fringe. Thus, employers may provide qualified transportation fringe benefits up to the applicable monthly limit either in addition to employees’ compensation or by reducing employees’ compensation (compensation reduction).
When an employee elects to reduce their compensation for a month by an amount that exceeds the qualified transportation fringe benefits actually provided in that month, the employer may apply this excess towards qualified transportation fringe benefits in subsequent years. However, an employer cannot provide a cash refund, even when the employee’s compensation reduction exceeds the employee’s qualified transportation fringe benefits.
In other words, an employee may receive a cash reimbursement of compensation reduction amounts only as reimbursement of qualified transportation fringe benefits and not for any other fringe benefit. IRS rules do not permit unused qualified transportation fringe benefits to be contributed to a health FSA under a Section 125 cafeteria plan.
