February 22, 2022 1:55 am

No Cash Back for Unused Transportation Fringe Benefits

Transportation fringe benefits, which include free parking, transit passes, and van pooling, may be funded either by the employer as a tax-free benefit up to a monthly dollar limit ($280 per month in 2022) or by a salary reduction arrangement in which employees pay for their benefits on a pre-tax basis. However, the IRS has made it clear that employees who contributed pre-tax earnings to a compensation reduction arrangement for transportation fringe benefits (typically to cover the cost of monthly transit passes) may not recoup cash for unused contributions (INFO 2021-0027). Due to the pandemic, employees who were required or chose to work remotely may not have used up their pre-tax contributions. They cannot get them back and they cannot take any tax deduction for this loss.

What about employees who are laid off during the pandemic? An employer may only provide qualified transportation fringe benefits to individuals who are current employees at the time the benefits are provided. Employers cannot continue providing qualified transportation fringe benefits to individuals who no longer are employees. This rule applies regardless of whether the benefits are provided in addition to an employee’s regular compensation or under a compensation reduction agreement. It does not matter whether the employee left voluntarily or was terminated. When an employee is leaves the job, compensation reduction amounts are reimbursable only for qualified transportation expenses incurred prior to the employee’s termination.

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Tax Glossary

Roth IRA

A nondeductible contributory IRA that allows for tax-free accumulation of income. Qualifying distributions are completely tax free.

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