IRS updates rules for electronic transit fare media — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

IRS updates rules for electronic transit fare media

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The first time the IRS allowed employees to pay for their qualified mass transit benefits (up to $130 a month for 2015) through smartcards, debit cards, etc., in 2006, most municipalities’ computer systems couldn’t handle the load. Now that those computer systems are up to speed, the IRS has reissued its 2006 ruling and brought it up to date.

What’s new: Delivery charges employees incur to acquire fare media count as part of their tax-free benefits. (Rev. Rul. 2014-32, IRB 2014-50)

Hop on the train, Jane. Employers may provide employees—on a tax-free basis—with transit-system-branded smartcards (i.e., cards with embedded chips), terminal-restricted debit cards that may only be used to purchase fare media and debit cards that are restricted for use at merchants that sell fare media. Watch out: Since merchants can sell other merchandise as well, debit cards must be further restricted to allow the purchase of fare media only. Employees don’t have to substantiate their commuting expenses to their employers.

Not in such a hurry, Murray. The rules are more complicated if you can’t deal directly with a municipal transit system, or a third-party’s cards aren’t restricted to buying fare media. In those situations, employees’ tax-free benefits are limited to reimbursements that they substantiate under a bona fide cash reimbursement arrangement. A bona fide cash reimbursement arrangement, the IRS says, doesn’t include an arrangement that depends solely on employees’ certifying in advance that they will incur expenses at some future date. Bottom line: These accounts can’t be pre-funded and benefits can’t be provided to new hires for their first month on the job.

END OF THE TRACK, JACK: Benefits provided on nonrestricted cards (i.e., cards that also allow employees to buy other items) are fully taxable to employees if they’re not required to substantiate their commuting expenses by, for example, submitting used monthly train tickets. In addition, beginning next year, you may no longer provide commuting benefits under a bona fide cash reimbursement arrangement when terminal-restricted debit cards are readily available for direct distribution to employees.

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