Photo: Dan Macy
Employers that offer mass transit benefits have an opportunity to put in their two cents’ worth on whether the IRS should issue clarifying guidance on the use of smartcards in conjunction with qualified transportation fringe benefits. The IRS said in Notice 2012-38, which it issued May 26, “The Treasury Department and the Internal Revenue Service have become aware of changes in technology that may give rise to the need for additional guidance on the issue of electronic media to provide benefits.” The new guidance would build on Revenue Ruling 2006-57.
The IRS delayed the effective date of Rev. Rul. 2006-57 — which finally went into effect Jan. 1, 2012 — for five years, to give transit agencies more time to comply with the technical requirements of providing the kind of transit voucher that employers could use under the guidance. Now that the 2006 guidance is finally in effect, advances in debit card and fare media technology may have had time to trump some of the assumptions on which the guidance was built.
Under a QTFB plan, an employee can use pre-tax funds — either the employee’s own money that is set aside through payroll deduction, or money the employer gives to the employee as part of a qualified benefit — to pay for commuting expenses.
What Does ‘Readily Available’ Mean?
The tax Code permits employers that offer QTFBs to use cash reimbursement arrangements to provide employees with the benefit, unless “a voucher or similar item which may be exchanged only for a transit pass” is “readily available,” IRS Notice 2012-38 notes. The notice asks for comments on what the definition of “readily available” should be, taking new technology into consideration.
Notice 2012-38 recounts that when the IRS issued Rev. Rul. 2006-57, the agency “lacked sufficient factual context to develop guidance regarding whether terminal-restricted debit cards were ‘readily available’.” A “terminal-restricted” card is one that a cardholder can use only at merchant terminals at points of sale at which only fare media for the local transit system is sold; for example, the transit agency itself. Under the 2006 guidance, a QTFB can incorporate these types of cards because the cards qualify as transit system vouchers under Treas. Reg. §1.132-9(b). Such cards were viewed as being good enough for an employer to use in a QTFB, primarily because an employee could not use such a card to purchase anything but fare media (or to pay parking fees at transit stations).
Should MCC-restricted Cards Be Reconsidered?
The quandary the IRS now has is whether technology developed since 2006 has enabled other types of payment forms to qualify as transit vouchers under the tax Code. For example, another kind of debit card — to which the 2006 guidance refers as an “MCC-restricted” card — does not satisfy the criteria for a transit system voucher, because cardholders might be able to use the card to buy items or services other than transit fare. MCC stands for merchant category code, and when the IRS wrote Rev. Rul. 2006-57, the holder of an MCC-restricted card could use that card to purchase non-transit goods and services at a merchant — say, a convenience store — if the merchant was assigned an MCC that indicated that they sell fare media for the local transit system (among other items). While such a card is not ideal for use in a QTFB, the 2006 guidance states that employers may distribute them in a bona fide cash reimbursement arrangement in places where transit passes are not readily available.
Notice 2012-38 says, “Treasury and the IRS have become aware of technological advances that may enable providers of MCC-restricted debit cards to limit the use of these cards to such an extent that it is almost, if not entirely, impossible to use the cards to purchase any items other than fare media.” The IRS is now seeking public comment on whether MCC-restricted debit cards are “sufficiently circumscribed so that the cards qualify as transit passes or vouchers providing transit benefits.”
Substantiation
At the heart of the issue is a tax Code requirement to substantiate purchases made under QTFBs. A qualifying transit voucher system allows employers and employees to skip the task of saving receipts, because a system that meets the requirements of the 2006 guidance is presumed to have enough safeguards to keep employees from using the QTFB funds for non-transportation goods and services.
The IRS is accepting comments on the guidance until August 27. Notice 2012-38 has instructions for submitting comments on p. 11.