(This is a continuation of the previous story)
Exactly what standard of protection is acceptable in a QTFB debit card is unsettled. Not all cards are created equal, and some types do a better job of restricting transactions than others. Swafford maintains that the debit card program the DOT has implemented is not only not the best way to prevent fraud and misuse of funds. It is also “contrary to existing IRS code requirements, the stated intent of Congress, and current IRS regulations and rulings for debit card use within QTFBs,” he said.
The DOT asserted in its response to TranBen, that it has been “closely coordinating with the IRS throughout the development and ongoing roll-out of the DOT debit card to ensure that the DOT Debit Card Program will provide a benefit to federal employees that is excluded from taxation as a fringe benefit.”
But exactly which direction the IRS is headed in its guidance for the public has not been entirely clear. Committees in both chambers of Congress have sent letters to the IRS commissioner, at the time Doug Shulman, asking for the agency’s position on the matter. At least one of them — the Senate Finance Committee — received a detailed response from the IRS after transmitting a document to Shulman listing questions relating to TRANServe. Question No. 32 on the document concluded with a statement: “This lack of transparency and accountability are unacceptable.”
The IRS indicated in its response to the committee that part of the reason the DOT chose the debit card system was a prohibition against federal agencies allowing non-government entities to hold government funds. “Under 31 U.S.C. 3302, federal agencies are prohibited from holding public money outside of Treasury, meaning that agencies may not have a private entity or financial institution hold such money … DOT’s delivery of transit benefits via debit card involves the depositing of transit benefit funds to an account with a designated fiscal agent where they are held on behalf of the agency until utilized by cardholders,” the IRS stated.
Cards’ Technical Requirements Still not Settled
The IRS has given the issue higher visibility by placing it on its 2013 priority guidance plan. Nevertheless, the question of what kinds of debit cards are acceptable is still not settled. A series of IRS actions over the past six years sheds light on just how sticky the issue has become. In 2006, the IRS issued guidance on how debit cards and “smartcards” — plastic cards that electronically store monetary value to be used to buy transit fare and sometimes pay for parking — are allowed within QTFB plans in order for the QTFB plan to enjoy tax-free status. But the IRS delayed the effective date of the guidance five times, taking the effective date all the way to Jan. 1, 2012, citing the need to allow local transit agencies more time to fine-tune their own electronic systems to work with debit cards and services private financial institutions issue.
Not long after the effective date of the 2006 guidance — which parsed technical terms like “MCC-restricted” and “terminal-restricted” debit cards — the IRS published a request for public comments on another aspect of debit cards used in QTFBs, signalling that, due to the continual evolution of technology, the issue had not yet come to an end. (See boxes, below, for explanations of each type of debit card.)
“Treasury and the IRS have become aware of technological advances that enable providers of MCC-restricted debit cards,” stated IRS Notice 2012-38, released May 26, 2012, “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 was now asking the public to submit comments on whether MCC-restricted cards were “sufficiently circumscribed so that the cards qualify as transit passes or vouchers providing transit benefits.” But, as with many federal regulations, there is a back door, and the IRS has not banned MCC-restricted cards outright. In regions where a compliant “voucher” system is not readily available, an employer may fall back on using MCC-restricted cards.
Is a Voucher System Readily Available?
In order to explain why TranBen asserts that the DOT’s program is out of compliance with IRS guidelines, a primer on what the IRS constitutes an acceptable “voucher” system is necessary. While the IRS concluded in its 2006 guidance — Revenue Ruling 2006-57 — that MCC-restricted debit cards are not restrictive enough to qualify for use as a voucher system for QTFBs, the revenue ruling did leave the door open to their use under limited circumstances. If a valid transit voucher system is not “readily available” in a given region, an employer may distribute MCC-restricted debit cards in a bona fide cash reimbursement arrangement. (See Treas. Reg. §1.132-9(b); also, see ¶612 for more on bona fide cash reimbursement plans and the term “readily available.”)
The IRS concluded in its 2006 guidance that another kind of debit card — “terminal-restricted” — does meet the 2006 guidelines. But the TRANServe debit card is MCC-restricted. While MCC-restricted cards restrict transactions to purchases made at merchants that sell fare media, terminal-restricted cards restrict transactions to merchants that sell only fare media.
But DOT defends the MCC-restricted card in the face of TranBen’s claims. A DOT spokesperson said in an e-mail to Thompson:
The Department conducted extensive testing of the cards before they were issued, to ensure they can only be used to provide transit benefits to eligible employees. We continue to monitor employee use of the cards after they are issued to further ensure they are used only as intended. In addition, the new debit card system allows unused benefits to automatically be returned to the government, which DOT estimates could result in as much as $9 million in annual savings.
Terminal-restricted Cards
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. In most cases, this would be the transit agency itself.
MCC-restricted Cards
A merchant category code- or MCC-restricted debit card is one that a cardholder can use only at merchants that have a merchant category code indicating that they sell transit fare media, among other merchandise. The holder of an MCC-restricted card could use that card to purchase non-transit goods and services at a merchant that also sells items like bus and commuter train passes. A typical example would be a local drugstore chain.