The IRS is giving hope to employees who yearn to skip the traffic by entering the HOV lane, which requires at least two, and sometimes more, passengers in a vehicle.
Even better: If a vehicle meets the requirements for a commuter highway vehicle, employees can defray their costs on a tax-free basis, up to $130 a month. The IRS discussed the requirements for commuter highway vehicles in two Information Letters to an inquiring employer.
Note: Information Letters are intended as private advice from the IRS to a requesting party. They may be used for informational purposes only; they may not be used or cited as precedent.
Everybody into the (van) pool. A commuter highway vehicle must seat at least six adults, not including the driver. At least 80% of its mileage must be commuting-related and at least 50% of the passengers must be employees. This is called the 80/50 rule. The question for the IRS was how this so-called 80/50 rule applies.
IRS: The application of the 80/50 rule depends on whether the vehicle is employer-operated, employee-operated or operated by a third party.
- Employers may purchase or lease a van or contract with a third party to operate the service. If an employer-operated van meets the requirements for a commuter highway vehicle, then up to $130 a month may be excluded from employees’ pay as a tax-free qualified transportation .
- Employees may band together and operate a van independent of their employer. If an employee-operated van meets the requirements for a commuter highway vehicle, then employees may be reimbursed, up to $130 a month. The accountable plan rules apply.
- The 80/50 rule doesn’t apply to vehicles operated by public transit authorities or private companies. If transit passes for van pool transportation are readily available, employers must distribute them to employees. If passes aren’t readily available, employers may provide employees with cash reimbursements. The accountable plan rules apply. (INFO 2014-0028)
Who’s driving this van? The IRS was next asked to define the term “operated.”
IRS: The tax code doesn’t define “operated” in this context. In determining whether a vehicle is operated by an employer, an employee or a private or public transit authority, factors such as who drives the vehicle, who determines the route and the pick-up and drop-off locations and times and who is responsible for administrative details are relevant. (INFO 2015-0004)