[Federal Register Volume 66, Number 8 (Thursday, January 11, 2001)]
[Rules and Regulations]
[Pages 2241-2251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-294]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service (IRS)

26 CFR Parts 1 and 602

[TD 8933]
RIN 1545-AX33


Qualified Transportation Fringe Benefits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

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SUMMARY: This document contains final regulations relating to qualified 
transportation fringe benefits. These final regulations provide rules 
to ensure that transportation benefits provided to employees are 
excludable from gross income. These final regulations reflect changes 
to the law made by the Energy Policy Act of 1992, the Taxpayer Relief 
Act of 1997, and the Transportation Equity Act for the 21st Century. 
These final regulations affect employers that offer qualified 
transportation fringes and employees who receive these benefits.

DATES: Effective Date: These regulations are effective January 11, 
2001.
    Applicability Date: For dates of applicability, see Sec. 1.132-
9(b), Q/A-25.

FOR FURTHER INFORMATION CONTACT: John Richards, (202) 622-6040 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
under control number 1545-1676. Responses to this collection of 
information are mandatory to obtain the benefit described under section 
132(f).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    The estimated average annual recordkeeping burden per recordkeeper 
is 26.5 hours. The estimated annual reporting burden per respondent is 
.8 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 (Income Tax 
Regulations). On January 27, 2000, a proposed regulation (REG-113572-
99) relating to qualified transportation fringes was published in the 
Federal Register (65 FR 4388). A public hearing was held on June 1, 
2000. Written or electronic comments responding to the notice of 
proposed rulemaking were received. After consideration of all the 
comments, the proposed regulations are adopted as amended by this 
Treasury decision. The revisions are discussed below.

Explanation of Provisions and Summary of Comments

    In general, comments received on the proposed regulations were 
favorable and, accordingly, the final regulations retain the general 
structure of the proposed regulations, including the question and 
answer format and a variety of examples illustrating the substance of 
the final regulations. However, commentators made a number of specific 
recommendations for modifications and clarifications of the 
regulations. In response to these comments, the final regulations 
incorporate the modifications and clarifications described below.

A. Whether Vouchers are Readily Available

    Section 132(f)(3) provides that qualified transportation fringes 
include cash reimbursement for transit passes ``only if a voucher or 
similar item which may be exchanged only for a transit pass is not 
readily available for direct distribution by the employer to the 
employee.'' Thus, if vouchers are readily available, the employer must 
use vouchers and cash reimbursement of a mass transit expense would not 
be a qualified transportation fringe.
    Most of the comments received addressed the issue of whether 
vouchers are ``readily available.'' Commentators representing employers 
generally favored rules permitting cash reimbursement. Commentators 
representing transit operators and voucher providers generally favored 
rules not permitting cash reimbursement. The following discusses three 
issues raised by commentators: first, whether the proposed regulations' 
1 percent safe harbor should be retained; second, whether internal 
administrative costs should be considered in applying the 1 percent 
test; and third, whether other nonfinancial restrictions should be 
considered in determining whether vouchers are readily available.
1. The 1 Percent Safe Harbor
    Under Notice 94-3, 1994-1 C.B. 327, and the proposed regulations, a 
voucher is readily available if an employer can obtain it on terms no 
less favorable than those available to an individual employee and 
without incurring a significant administrative cost. Under the proposed 
regulations, administrative costs relate only to fees paid to fare 
media providers, and the determination of whether obtaining a voucher 
would result in a significant administrative cost is made with respect 
to each transit system voucher. The proposed regulations provide a rule 
under which administrative costs are treated as significant if the 
average monthly administrative costs incurred by the employer for a 
voucher (disregarding delivery charges imposed by the fare media 
provider to the extent not in excess of $15 per order) are more than 1 
percent of the average monthly value of the vouchers for a system.
    Commentators, in particular those representing fare media providers 
and transit operators, suggested that the fare media provider fee 
percentage causing vouchers to not be readily available should be 
raised because many fare media providers charge fees in excess of the 1 
percent limit and, thus, under this

[[Page 2242]]

test, transit vouchers would not be considered readily available in 
some large metropolitan areas. These commentators assert that the 1 
percent test is therefore contrary to the intent of the statute. 
Commentators suggested that the 1 percent test, particularly if 
combined with inadequate cash reimbursement substantiation 
requirements, may result in taxpayer abuse, with the result that the 
benefit might not be used for the purpose for which it is intended, 
which is to increase the use of mass transit. In addition, commentators 
testified at the public hearing that the mandatory use of vouchers 
(with no ability to use cash reimbursement if vouchers are readily 
available) would increase the use of vouchers and promote the 
development of advanced technologies that minimize the burden on 
employers while ensuring that the benefit is used for mass transit. 
These new technologies might allow an employer to make payment directly 
to the transit operator, who in turn credits fare to the employee's 
magnetic media fare card, thus eliminating the need for employers to 
incur the expense of distributing vouchers.
    Other commentators, in particular groups representing employers, 
generally favored the 1 percent test, but suggested that internal costs 
be considered in applying the test (discussed below). These 
commentators took the position that an increase in the percentage might 
affect the market charge for such services. There was also a concern 
that a strict voucher-use requirement would result in fewer employers 
adopting transit pass programs, thus frustrating the purpose of section 
132(f) to increase the use of mass transit.
    The final regulations retain the 1 percent test. The 1 percent 
test, applicable for years beginning after December 31, 2003, is 
appropriate in light of the rule (discussed below) that only voucher 
provider fees are considered in determining availability. It is 
intended that the delayed application of this rule would provide 
sufficient time for those affected by this rule to modify their systems 
and procedures appropriately. The 1 percent threshold, coupled with the 
exclusion of internal administrative costs from the readily available 
determination, represents a balanced approach that will promote the 
growth of voucher programs in most transportation areas. In addition, 
raising the percentage threshold could curtail the growth in transit 
benefit programs, which would be contrary to the goal of increasing the 
use of mass transit. Finally, in cases where cash reimbursement is 
allowed, adequate substantiation requirements will ensure that transit 
pass benefits will actually go toward mass transportation usage. In 
this regard, the proposed regulations provide that employers must 
implement reasonable procedures to ensure that an amount equal to the 
reimbursement was incurred for transit passes. For example, the final 
regulations clarify that in circumstances when employee certification 
is a reasonable reimbursement procedure, it must occur after the 
expense is incurred.
    The final regulations also clarify the application of the 1 percent 
rule if multiple vouchers for a transit system are available for 
distribution by an employer to employees, and if multiple transit 
system vouchers are required in an area to meet the transit needs of an 
employer's employees. The final regulations provide that if multiple 
transit system vouchers are available for direct distribution to 
employees, the employer must consider the lowest cost voucher for 
purposes of determining whether the voucher provider fees cause 
vouchers to not be readily available. However, if multiple vouchers are 
required in an area to meet the transit needs of the individual 
employees in that area, the employer has the option of averaging the 
costs applied to vouchers from each system for purposes of determining 
whether the voucher provider fees cause vouchers to not be readily 
available.
2. Internal Administrative Costs
    Several commentators representing employers recommended that, in 
addition to fare media provider fees, internal administrative costs, 
especially security and distribution costs, should be considered in 
determining whether vouchers are readily available. These commentators 
noted that administrative costs are increased when an employer must 
maintain both a voucher system and a reimbursement system to provide 
qualified transportation fringes. For example, the employer may 
maintain a cash reimbursement system for transportation in a commuter 
highway vehicle and qualified parking, and also maintain a voucher 
system for transit passes. In addition, several commentators suggested 
that the increased costs and administrative burden for employers that 
maintain offices in multiple cities should also be considered in 
determining whether vouchers are readily available.
    The final regulations retain the test considering only fees paid to 
voucher providers in determining availability based on a plain reading 
of the terms of the statute. The language ``readily available for 
direct distribution by the employer to the employee'' under section 
132(f)(3) in its plain, ordinary sense means that vouchers are easily 
obtainable for direct distribution to the employer's employees. The 
determination of availability bears no relationship with costs that may 
be incurred after vouchers have been obtained. The service fees charged 
by voucher providers and delivery costs can reasonably be viewed as 
affecting whether vouchers are easily obtainable; an employer's 
internal costs of subsequently administering a voucher program would 
not. Thus, based upon the plain language of section 132(f), internal 
administrative costs do not affect whether vouchers are readily 
available.
    Moreover, the test considering only voucher provider fees is a 
comparatively simple bright line test. A test that depends on the 
employer's internal administrative costs would necessarily be complex, 
requiring complex rules that would be difficult for employers to apply.
3. Other Nonfinancial Restrictions
    Commentators representing employers suggested that nonfinancial 
factors should be considered in determining whether vouchers are 
readily available. They suggested that factors such as whether there 
are reasonable advance purchase and minimum purchase requirements, and 
whether vouchers can be purchased in appropriate denominations, should 
be considered in determining availability. The final regulations adopt 
this suggestion because nonfinancial restrictions would reasonably 
affect whether vouchers are available for distribution by an employer 
to an employee.
    The final regulations provide guidance on the types of nonfinancial 
restrictions that cause vouchers to not be readily available. The final 
regulations provide that certain nonfinancial restrictions, such as a 
voucher provider not making vouchers available for purchase at 
reasonable intervals or failing to provide the vouchers within a 
reasonable period after receiving payment for the voucher, cause 
vouchers to not be readily available. In addition, if a voucher 
provider does not provide vouchers in reasonably appropriate 
quantities, or in reasonably appropriate denominations, vouchers may 
not be readily available.
    When and as the standards in these final regulations go into 
effect, they will supercede the current law standards in Notice 94-3.

[[Page 2243]]

B. Advance Transit Passes

    Commentators suggested that the administrability of transit pass 
programs would be improved if vouchers were permitted to be distributed 
in advance for more than one month. The final regulations adopt this 
suggestion.
    In October of this year, the IRS issued Announcement 2000-78 (2000-
43 I.R.B. 428) to notify taxpayers that, when finalized, the 
regulations will clarify that transit passes may be distributed in 
advance for more than one month (such as for a calendar quarter) by 
taking into account the monthly limits for all months for which the 
transit passes are distributed. The announcement further provides, 
however, that if an employee receives advance transit passes, and the 
employee's employment terminates before the beginning of the last month 
of the period for which the transit passes were provided, the employer 
must include in the employee's wages, for income and for employment tax 
purposes (FICA, FUTA, and income tax withholding), the value of the 
passes provided for those month(s) beginning after the employee's 
employment terminates to the extent the employer does not recover those 
transit passes or the value of those passes. The announcement provides 
that pending the issuance of these final regulations, employers may 
rely on the announcement.
    The final regulations differ from the announcement in one respect. 
In any case in which transit passes are provided in advance for a 
period of no more than three months (such as for a calendar quarter), 
but the recipient ceases to be an employee before the beginning of the 
last month in that period, the final regulations provide that the value 
of a transit pass provided in advance for a month is excluded from 
wages for employment tax (FICA, FUTA, and income tax withholding) 
purposes (but not for income tax purposes) unless at the time the 
transit passes were distributed there was an established termination 
date that was before the beginning of the last month of that period and 
the employee does in fact terminate employment before the beginning of 
the last month of that period.

C. Qualified Parking

    The final regulations address whether reimbursement paid to an 
employee for parking at a work location away from the employee's 
permanent work location is excludable from wages for income and 
employment tax purposes under section 132(f). Section 132(f)(5)(C) 
defines qualified parking, in part, as ``parking provided to an 
employee on or near the business premises of the employer * * * .'' The 
final regulations provide that qualified parking includes parking on or 
near a work location at which the employee performs services for the 
employer. However, qualified parking does not include reimbursement for 
parking that is otherwise excludable from gross income as a 
reimbursement treated as paid under an accountable plan under 
Sec. 1.62-2 of the Income Tax Regulations, or parking provided in kind 
to an employee that is excludable from the employee's gross income as a 
working condition fringe under section 132(a)(3). Thus, if the 
exclusion at Sec. 1.62-2 or section 132(a)(3) is available (even if not 
reimbursed by the employer), then section 132(f) does not apply.
    Whether a reimbursement for local transportation expenses, 
including parking at a work location away from the employee's permanent 
work location, is excludable from the employee's gross income under 
Sec. 1.62-2, or whether parking provided in kind to an employee is 
excludable from the employee's gross income under section 132(a)(3), is 
determined based upon whether the parking expenses would be deductible 
if paid or incurred by the employee under section 162(a) as an expense 
incurred in the employee's trade or business of being an employee for 
the employer. Secs. 1.62-2(d); 1.132-5(a)(2). Revenue Ruling 99-7 
(1999-1 C.B. 361) addresses under what circumstances daily 
transportation expenses, including parking, incurred by a taxpayer in 
going between the taxpayer's residence and a work location are 
deductible by the taxpayer under section 162(a).
    The final regulations provide the minimum requirements to ensure 
that transportation benefits are qualified transportation fringes under 
section 132(f). An employer may have a transit benefit program that is 
more restrictive than a program meeting the minimum requirements under 
the regulations. In addition, these regulations do not affect the 
application of authorities outside the Internal Revenue Code which may 
restrict a transportation benefit program. Federal Government agencies, 
for example, may be required by other federal law to implement 
restrictions beyond those required under these regulations.

D. Applicability Date

    The regulations are generally applicable for taxable years 
beginning after December 31, 2001. However, in order to provide a 
transition period for those affected by the 1 percent rule (described 
under ``The 1 percent safe harbor'' in this preamble), that rule is 
applicable for taxable years beginning after December 31, 2003.

Effect on Other Documents

    The following document is obsolete as of January 11, 2001: 
Announcement 2000-78 (2000-43 I.R.B. 428).
    The following document is modified as of the date these regulations 
become applicable (see Q/A-25): Notice 94-3 (1994-1 C.B. 327).

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. A final 
regulatory flexibility analysis has been prepared for the collection of 
information in this Treasury decision under 5 U.S.C. 604. A summary of 
the analysis is set forth in this preamble under the heading ``Summary 
of Final Regulatory Flexibility Analysis.''

Summary of Final Regulatory Flexibility Analysis

    This analysis is required under the Regulatory Flexibility Act (5 
U.S.C. chapter 6). The collection of information under this rule is 
based upon the requirements under section 132(f). We estimate that 
approximately 265,000 employers that provide qualified transportation 
fringes to their employees will be affected by the recordkeeping 
requirements of this rule. None of the comments received in response to 
the notice of proposed rulemaking specifically addressed the initial 
regulatory flexibility analysis.
    Section 132(f)(3) provides that qualified transportation fringes 
may be provided in the form of cash reimbursement. The legislative 
history indicates that an employer providing cash reimbursement to the 
employer's employees for qualified transportation fringes must 
establish a bona fide reimbursement arrangement. As a condition to 
providing cash reimbursement for qualified transportation fringes, this 
rule provides that employers must receive substantiation from 
employees. The objective of this rule is to ensure that reimbursements 
are made for qualified transportation fringes.
    Whether an arrangement constitutes a bona fide reimbursement 
arrangement varies depending on the facts and circumstances, including 
the method or

[[Page 2244]]

methods of payment utilized within a mass transit system. An employee 
certification in either written or electronic form may be sufficient 
depending upon the facts and circumstances. For example, if receipts 
are not provided in the ordinary course of business, such as with 
respect to metered parking or used transit passes that cannot be 
returned to the user, an employee certification that expenses have been 
incurred constitutes a reasonable reimbursement procedure. A 
certification that expenses will be incurred in the future, by itself, 
is not a reasonable reimbursement procedure. There are no particular 
professional skills required to maintain these records.
    In addition, section 132(f)(4) provides that an employee may choose 
between cash compensation and qualified transportation fringes. This 
rule provides that an employer may allow an employee the choice to 
receive either a fixed amount of cash compensation at a specified 
future date or a fixed amount of qualified transportation fringes to be 
provided for a specified future period (such as qualified parking to be 
used during a future calendar month). This rule provides that employers 
must keep records with respect to employee compensation reduction 
elections. An employee's election must be in writing or some other 
permanent and verifiable form, and include the date of the election, 
the amount of compensation to be reduced, and the period for which the 
qualified transportation fringes will be provided. The objective of 
this rule is to ensure against recharacterization of taxable 
compensation after it has been paid to the employee. There are no 
particular professional skills required to maintain these records.
    A less burdensome alternative for small organizations would be to 
exempt those entities from the recordkeeping requirements under this 
rule. However, it would be inconsistent with the statutory provisions 
and legislative history to exempt those entities from the recordkeeping 
requirements imposed under this rule.
    This rule provides several options which avoid more burdensome 
recordkeeping requirements for small entities. This rule provides that 
(1) there are no substantiation requirements if the employer 
distributes transit passes in kind; (2) a compensation reduction 
election may be made electronically; (3) an election to reduce 
compensation may be automatically renewed; (4) an employer may provide 
for deemed compensation reduction elections under its qualified 
transportation fringe benefit plan; and (5) a requirement that a 
voucher be distributed in-kind by the employer is satisfied if the 
voucher is distributed by the employer or by another person on behalf 
of the employer (for example, if a transit operator credits amounts to 
the employee's fare card as a result of payments made to the operator 
by the employer).

Drafting Information

    The principal author of these regulations is John Richards, Office 
of the Assistant Chief Counsel (Exempt Organizations/Employment Tax/
Government Entities). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Employment taxes, Income taxes, Reporting and recordkeeping 
requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.132-0 is amended by:
    1. Adding an entry for Sec. 1.132-5(p)(4)
    2. Adding entries for Sec. 1.132-9.
    The additions read as follows:


Sec. 1.132-0  Outline of regulations under section 132.

* * * * *


Sec. 1.132-5  Working condition fringes.

* * * * *
    (p) * * *
    (4) Dates of applicability.
* * * * *


Sec. 1.132-9  Qualified transportation fringes.

    (a) Table of contents.
    (b) Questions and answers.


    Par. 3. Section 1.132-5 is amended by adding paragraph (p)(4) to 
read as follows:


Sec. 1.132-5  Working condition fringes.

* * * * *
    (p) * * *
    (4) Dates of applicability. This paragraph (p) applies to benefits 
provided before January 1, 1993. For benefits provided after December 
31, 1992, see Sec. 1.132-9.
* * * * *

    Par. 4. Section 1.132-9 is added to read as follows:


Sec. 1.132-9  Qualified transportation fringes.

    (a) Table of contents. This section contains a list of the 
questions and answers in Sec. 1.132-9.

    (1) General rules.
    Q-1. What is a qualified transportation fringe?
    Q-2. What is transportation in a commuter highway vehicle?
    Q-3. What are transit passes?
    Q-4. What is qualified parking?
    Q-5. May qualified transportation fringes be provided to 
individuals who are not employees?
    Q-6. Must a qualified transportation fringe benefit plan be in 
writing?
    (2) Dollar limitations.
    Q-7. Is there a limit on the value of qualified transportation 
fringes that may be excluded from an employee's gross income?
    Q-8. What amount is includible in an employee's wages for income 
and employment tax purposes if the value of the qualified 
transportation fringe exceeds the applicable statutory monthly 
limit?
    Q-9. Are excludable qualified transportation fringes calculated 
on a monthly basis?
    Q-10. May an employee receive qualified transportation fringes 
from more than one employer?
    (3) Compensation reduction.
    Q-11. May qualified transportation fringes be provided to 
employees pursuant to a compensation reduction agreement?
    Q-12. What is a compensation reduction election for purposes of 
section 132(f)?
    Q-13. Is there a limit to the amount of the compensation 
reduction?
    Q-14. When must the employee have made a compensation reduction 
election and under what circumstances may the amount be paid in cash 
to the employee?
    Q-15. May an employee whose qualified transportation fringe 
costs are less than the employee's compensation reduction carry over 
this excess amount to subsequent periods?
    (4) Expense reimbursements.
    Q-16. How does section 132(f) apply to expense reimbursements?
    Q-17. May an employer provide nontaxable cash reimbursement 
under section 132(f) for periods longer than one month?
    Q-18. What are the substantiation requirements if an employer 
distributes transit passes?
    Q-19. May an employer choose to impose substantiation 
requirements in addition to those described in this regulation?
    (5) Special rules for parking and vanpools.
    Q-20. How is the value of parking determined?
    Q-21. How do the qualified transportation fringe rules apply to 
van pools?
    (6) Reporting and employment taxes.

[[Page 2245]]

    Q-22. What are the reporting and employment tax requirements for 
qualified transportation fringes?
    (7) Interaction with other fringe benefits.
    Q-23. How does section 132(f) interact with other fringe benefit 
rules?
    (8) Application to individuals who are not employees.
    Q-24. May qualified transportation fringes be provided to 
individuals who are partners, 2-percent shareholders of S-
corporations, or independent contractors?
    (9) Effective date.
    Q-25. What is the effective date of this section?

    (b) Questions and answers.
    Q-1. What is a qualified transportation fringe?
    A-1. (a) The following benefits are qualified transportation fringe 
benefits:
    (1) Transportation in a commuter highway vehicle.
    (2) Transit passes.
    (3) Qualified parking.
    (b) An employer may simultaneously provide an employee with any one 
or more of these three benefits.
    Q-2. What is transportation in a commuter highway vehicle?
    A-2. Transportation in a commuter highway vehicle is transportation 
provided by an employer to an employee in connection with travel 
between the employee's residence and place of employment. A commuter 
highway vehicle is a highway vehicle with a seating capacity of at 
least 6 adults (excluding the driver) and with respect to which at 
least 80 percent of the vehicle's mileage for a year is reasonably 
expected to be--
    (a) For transporting employees in connection with travel between 
their residences and their place of employment; and
    (b) On trips during which the number of employees transported for 
commuting is at least one-half of the adult seating capacity of the 
vehicle (excluding the driver).
    Q-3. What are transit passes?
    A-3. A transit pass is any pass, token, farecard, voucher, or 
similar item (including an item exchangeable for fare media) that 
entitles a person to transportation--
    (a) On mass transit facilities (whether or not publicly owned); or
    (b) Provided by any person in the business of transporting persons 
for compensation or hire in a highway vehicle with a seating capacity 
of at least 6 adults (excluding the driver).
    Q-4. What is qualified parking?
    A-4. (a) Qualified parking is parking provided to an employee by an 
employer--
    (1) On or near the employer's business premises; or
    (2) At a location from which the employee commutes to work 
(including commuting by carpool, commuter highway vehicle, mass transit 
facilities, or transportation provided by any person in the business of 
transporting persons for compensation or hire).
    (b) For purposes of section 132(f), parking on or near the 
employer's business premises includes parking on or near a work 
location at which the employee provides services for the employer. 
However, qualified parking does not include--
    (1) The value of parking provided to an employee that is excludable 
from gross income under section 132(a)(3) (as a working condition 
fringe), or
    (2) Reimbursement paid to an employee for parking costs that is 
excludable from gross income as an amount treated as paid under an 
accountable plan. See Sec. 1.62-2.
    (c) However, parking on or near property used by the employee for 
residential purposes is not qualified parking.
    (d) Parking is provided by an employer if--
    (1) The parking is on property that the employer owns or leases;
    (2) The employer pays for the parking; or
    (3) The employer reimburses the employee for parking expenses (see 
Q/A-16 of this section for rules relating to cash reimbursements).
    Q-5. May qualified transportation fringes be provided to 
individuals who are not employees?
    A-5. An employer may provide qualified transportation fringes only 
to individuals who are currently employees of the employer at the time 
the qualified transportation fringe is provided. The term employee for 
purposes of qualified transportation fringes is defined in Sec. 1.132-
1(b)(2)(i). This term includes only common law employees and other 
statutory employees, such as officers of corporations. See Q/A-24 of 
this section for rules regarding partners, 2-percent shareholders, and 
independent contractors.
    Q-6. Must a qualified transportation fringe benefit plan be in 
writing?
    A-6. No. Section 132(f) does not require that a qualified 
transportation fringe benefit plan be in writing.
    Q-7. Is there a limit on the value of qualified transportation 
fringes that may be excluded from an employee's gross income?
    A-7. (a) Transportation in a commuter highway vehicle and transit 
passes. Before January 1, 2002, up to $65 per month is excludable from 
the gross income of an employee for transportation in a commuter 
highway vehicle and transit passes provided by an employer. On January 
1, 2002, this amount is increased to $100 per month.
    (b) Parking. Up to $175 per month is excludable from the gross 
income of an employee for qualified parking.
    (c) Combination. An employer may provide qualified parking benefits 
in addition to transportation in a commuter highway vehicle and transit 
passes.
    (d) Cost-of-living adjustments. The amounts in paragraphs (a) and 
(b) of this Q/A-7 are adjusted annually, beginning with 2000, to 
reflect cost-of-living. The adjusted figures are announced by the 
Service before the beginning of the year.
    Q-8. What amount is includible in an employee's wages for income 
and employment tax purposes if the value of the qualified 
transportation fringe exceeds the applicable statutory monthly limit?
    A-8. (a) Generally, an employee must include in gross income the 
amount by which the fair market value of the benefit exceeds the sum of 
the amount, if any, paid by the employee and any amount excluded from 
gross income under section 132(a)(5). Thus, assuming no other statutory 
exclusion applies, if an employer provides an employee with a qualified 
transportation fringe that exceeds the applicable statutory monthly 
limit and the employee does not make any payment, the value of the 
benefits provided in excess of the applicable statutory monthly limit 
is included in the employee's wages for income and employment tax 
purposes. See Sec. 1.61-21(b)(1).
    (b) The following examples illustrate the principles of this Q/A-8:

    Example 1. (i) For each month in a year in which the statutory 
monthly transit pass limit is $100 (i.e., a year after 2001), 
Employer M provides a transit pass valued at $110 to Employee D, who 
does not pay any amount to Employer M for the transit pass.
    (ii) In this Example 1, because the value of the monthly transit 
pass exceeds the statutory monthly limit by $10, $120 ($110--$100, 
times 12 months) must be included in D's wages for income and 
employment tax purposes for the year with respect to the transit 
passes.
    Example 2. (i) For each month in a year in which the statutory 
monthly qualified parking limit is $175, Employer M provides 
qualified parking valued at $195 to Employee E, who does not pay any 
amount to M for the parking.
    (ii) In this Example 2, because the fair market value of the 
qualified parking exceeds the statutory monthly limit by $20, $240 
($195--$175, times 12 months) must be included in Employee E's wages 
for income and employment tax purposes for the year with respect to 
the qualified parking.
    Example 3. (i) For each month in a year in which the statutory 
monthly qualified parking limit is $175, Employer P provides

[[Page 2246]]

qualified parking with a fair market value of $220 per month to its 
employees, but charges each employee $45 per month.
    (ii) In this Example 3, because the sum of the amount paid by an 
employee ($45) plus the amount excludable for qualified parking 
($175) is not less than the fair market value of the monthly 
benefit, no amount is includible in the employee's wages for income 
and employment tax purposes with respect to the qualified parking.

    Q-9. Are excludable qualified transportation fringes calculated on 
a monthly basis?
    A-9. (a) In general. Yes. The value of transportation in a commuter 
highway vehicle, transit passes, and qualified parking is calculated on 
a monthly basis to determine whether the value of the benefit has 
exceeded the applicable statutory monthly limit on qualified 
transportation fringes. Except in the case of a transit pass provided 
to an employee, the applicable statutory monthly limit applies to 
qualified transportation fringes used by the employee in a month. 
Monthly exclusion amounts are not combined to provide a qualified 
transportation fringe for any month exceeding the statutory limit. A 
month is a calendar month or a substantially equivalent period applied 
consistently.
    (b) Transit passes. In the case of transit passes provided to an 
employee, the applicable statutory monthly limit applies to the transit 
passes provided by the employer to the employee in a month for that 
month or for any previous month in the calendar year. In addition, 
transit passes distributed in advance for more than one month, but not 
for more than twelve months, are qualified transportation fringes if 
the requirements in paragraph (c) of this Q/A-9 are met (relating to 
the income tax and employment tax treatment of advance transit passes). 
The applicable statutory monthly limit under section 132(f)(2) on the 
combined amount of transportation in a commuter highway vehicle and 
transit passes may be calculated by taking into account the monthly 
limits for all months for which the transit passes are distributed. In 
the case of a pass that is valid for more than one month, such as an 
annual pass, the value of the pass may be divided by the number of 
months for which it is valid for purposes of determining whether the 
value of the pass exceeds the statutory monthly limit.
    (c) Rule if employee's employment terminates--(1) Income tax 
treatment. The value of transit passes provided in advance to an 
employee with respect to a month in which the individual is not an 
employee is included in the employee's wages for income tax purposes.
    (2) Reporting and employment tax treatment. Transit passes 
distributed in advance to an employee are excludable from wages for 
employment tax purposes under sections 3121, 3306, and 3401 (FICA, 
FUTA, and income tax withholding) if the employer distributes transit 
passes to the employee in advance for not more than three months and, 
at the time the transit passes are distributed, there is not an 
established date that the employee's employment will terminate (for 
example, if the employee has given notice of retirement) which will 
occur before the beginning of the last month of the period for which 
the transit passes are provided. If the employer distributes transit 
passes to an employee in advance for not more than three months and at 
the time the transit passes are distributed there is an established 
date that the employee's employment will terminate, and the employee's 
employment does terminate before the beginning of the last month of the 
period for which the transit passes are provided, the value of transit 
passes provided for months beginning after the date of termination 
during which the employee is not employed by the employer is included 
in the employee's wages for employment tax purposes. If transit passes 
are distributed in advance for more than three months, the value of 
transit passes provided for the months during which the employee is not 
employed by the employer is includible in the employee's wages for 
employment tax purposes regardless of whether at the time the transit 
passes were distributed there was an established date of termination of 
the employee's employment.
    (d) Examples. The following examples illustrate the principles of 
this Q/A-9:

    Example 1. (i) Employee E incurs $150 for qualified parking used 
during the month of June of a year in which the statutory monthly 
parking limit is $175, for which E is reimbursed $150 by Employer R. 
Employee E incurs $180 in expenses for qualified parking used during 
the month of July of that year, for which E is reimbursed $180 by 
Employer R.
    (ii) In this Example 1, because monthly exclusion amounts may 
not be combined to provide a benefit in any month greater than the 
applicable statutory limit, the amount by which the amount 
reimbursed for July exceeds the applicable statutory monthly limit 
($180 minus $175 equals $5) is includible in Employee E's wages for 
income and employment tax purposes.
    Example 2. (i) Employee F receives transit passes from Employer 
G with a value of $195 in March of a year (for which the statutory 
monthly transit pass limit is $65) for January, February, and March 
of that year. F was hired during January and has not received any 
transit passes from G.
    (ii) In this Example 2, the value of the transit passes (three 
months times $65 equals $195) is excludable from F's wages for 
income and employment tax purposes.
    Example 3. (i) Employer S has a qualified transportation fringe 
benefit plan under which its employees receive transit passes near 
the beginning of each calendar quarter for that calendar quarter. 
All employees of Employer S receive transit passes from Employer S 
with a value of $195 on March 31 for the second calendar quarter 
covering the months April, May, and June (of a year in which the 
statutory monthly transit pass limit is $65).
    (ii) In this Example 3, because the value of the transit passes 
may be calculated by taking into account the monthly limits for all 
months for which the transit passes are distributed, the value of 
the transit passes (three months times $65 equals $195) is 
excludable from the employees' wages for income and employment tax 
purposes.
    Example 4. (i) Same facts as in Example 3, except that Employee 
T, an employee of Employer S, terminates employment with S on May 
31. There was not an established date of termination for Employee T 
at the time the transit passes were distributed.
    (ii) In this Example 4, because at the time the transit passes 
were distributed there was not an established date of termination 
for Employee T, the value of the transit passes provided for June 
($65) is excludable from T's wages for employment tax purposes. 
However, the value of the transit passes distributed to Employee T 
for June ($65) is not excludable from T's wages for income tax 
purposes.
    (iii) If Employee T's May 31 termination date was established at 
the time the transit passes were provided, the value of the transit 
passes provided for June ($65) is included in T's wages for both 
income and employment tax purposes.
    Example 5. (i) Employer F has a qualified transportation fringe 
benefit plan under which its employees receive transit passes semi-
annually in advance of the months for which the transit passes are 
provided. All employees of Employer F, including Employee X, receive 
transit passes from F with a value of $390 on June 30 for the 6 
months of July through December (of a year in which the statutory 
monthly transit pass limit is $65). Employee X's employment 
terminates and his last day of work is August 1. Employer F's other 
employees remain employed throughout the remainder of the year.
    (ii) In this Example 5, the value of the transit passes provided 
to Employee X for the months September, October, November, and 
December ($65 times 4 months equals $260) of the year is included in 
X's wages for income and employment tax purposes. The value of the 
transit passes provided to Employer F's other employees is 
excludable from the employees' wages for income and employment tax 
purposes.
    Example 6. (i) Each month during a year in which the statutory 
monthly transit pass limit is $65, Employer R distributes transit

[[Page 2247]]

passes with a face amount of $70 to each of its employees. Transit 
passes with a face amount of $70 can be purchased from the transit 
system by any individual for $65.
    (ii) In this Example 6, because the value of the transit passes 
distributed by Employer R does not exceed the applicable statutory 
monthly limit ($65), no portion of the value of the transit passes 
is included as wages for income and employment tax purposes.

    Q-10. May an employee receive qualified transportation fringes from 
more than one employer?
    A-10. (a) General rule. Yes. The statutory monthly limits described 
in Q/A-7 of this section apply to benefits provided by an employer to 
its employees. For this purpose, all employees treated as employed by a 
single employer under section 414(b), (c), (m), or (o) are treated as 
employed by a single employer. See section 414(t) and Sec. 1.132-1(c). 
Thus, qualified transportation fringes paid by entities under common 
control under section 414(b), (c), (m), or (o) are combined for 
purposes of applying the applicable statutory monthly limit. In 
addition, an individual who is treated as a leased employee of the 
employer under section 414(n) is treated as an employee of that 
employer for purposes of section 132. See section 414(n)(3)(C).
    (b) Examples. The following examples illustrate the principles of 
this Q/A-10:

    Example 1. (i) During a year in which the statutory monthly 
qualified parking limit is $175, Employee E works for Employers M 
and N, who are unrelated and not treated as a single employer under 
section 414(b), (c), (m), or (o). Each month, M and N each provide 
qualified parking benefits to E with a value of $100.
    (ii) In this Example 1, because M and N are unrelated employers, 
and the value of the monthly parking benefit provided by each is not 
more than the applicable statutory monthly limit, the parking 
benefits provided by each employer are excludable as qualified 
transportation fringes assuming that the other requirements of this 
section are satisfied.
    Example 2. (i) Same facts as in Example 1, except that Employers 
M and N are treated as a single employer under section 414(b).
    (ii) In this Example 2, because M and N are treated as a single 
employer, the value of the monthly parking benefit provided by M and 
N must be combined for purposes of determining whether the 
applicable statutory monthly limit has been exceeded. Thus, the 
amount by which the value of the parking benefit exceeds the monthly 
limit ($200 minus the monthly limit amount of $175 equals $25) for 
each month in the year is includible in E's wages for income and 
employment tax purposes.

    Q-11. May qualified transportation fringes be provided to employees 
pursuant to a compensation reduction agreement?
    A-11. Yes. An employer may offer employees a choice between cash 
compensation and any qualified transportation fringe. An employee who 
is offered this choice and who elects qualified transportation fringes 
is not required to include the cash compensation in income if--
    (a) The election is pursuant to an arrangement described in Q/A-12 
of this section;
    (b) The amount of the reduction in cash compensation does not 
exceed the limitation in Q/A-13 of this section;
    (c) The arrangement satisfies the timing and reimbursement rules in 
Q/A-14 and 16 of this section; and
    (d) The related fringe benefit arrangement otherwise satisfies the 
requirements set forth elsewhere in this section.
    Q-12. What is a compensation reduction election for purposes of 
section 132(f)?
    A-12. (a) Election requirements generally. A compensation reduction 
arrangement is an arrangement under which the employer provides the 
employee with the right to elect whether the employee will receive 
either a fixed amount of cash compensation at a specified future date 
or a fixed amount of qualified transportation fringes to be provided 
for a specified future period (such as qualified parking to be used 
during a future calendar month). The employee's election must be in 
writing or another form, such as electronic, that includes, in a 
permanent and verifiable form, the information required to be in the 
election. The election must contain the date of the election, the 
amount of the compensation to be reduced, and the period for which the 
benefit will be provided. The election must relate to a fixed dollar 
amount or fixed percentage of compensation reduction. An election to 
reduce compensation for a period by a set amount for such period may be 
automatically renewed for subsequent periods.
    (b) Automatic election permitted. An employer may provide under its 
qualified transportation fringe benefit plan that a compensation 
reduction election will be deemed to have been made if the employee 
does not elect to receive cash compensation in lieu of the qualified 
transportation fringe, provided that the employee receives adequate 
notice that a compensation reduction will be made and is given adequate 
opportunity to choose to receive the cash compensation instead of the 
qualified transportation fringe.
    Q-13. Is there a limit to the amount of the compensation reduction?
    A-13. Yes. Each month, the amount of the compensation reduction may 
not exceed the combined applicable statutory monthly limits for 
transportation in a commuter highway vehicle, transit passes, and 
qualified parking. For example, for a year in which the statutory 
monthly limit is $65 for transportation in a commuter highway vehicle 
and transit passes, and $175 for qualified parking, an employee could 
elect to reduce compensation for any month by no more than $240 ($65 
plus $175) with respect to qualified transportation fringes. If an 
employee were to elect to reduce compensation by $250 for a month, the 
excess $10 ($250 minus $240) would be includible in the employee's 
wages for income and employment tax purposes.
    Q-14. When must the employee have made a compensation reduction 
election and under what circumstances may the amount be paid in cash to 
the employee?
    A-14. (a) The compensation reduction election must satisfy the 
requirements set forth under paragraphs (b), (c), and (d) of this Q/A-
14.
    (b) Timing of election. The compensation reduction election must be 
made before the employee is able currently to receive the cash or other 
taxable amount at the employee's discretion. The determination of 
whether the employee is able currently to receive the cash does not 
depend on whether it has been constructively received for purposes of 
section 451. The election must specify that the period (such as a 
calendar month) for which the qualified transportation fringe will be 
provided must not begin before the election is made. Thus, a 
compensation reduction election must relate to qualified transportation 
fringes to be provided after the election. For this purpose, the date a 
qualified transportation fringe is provided is--
    (1) The date the employee receives a voucher or similar item; or
    (2) In any other case, the date the employee uses the qualified 
transportation fringe.
    (c) Revocability of elections. The employee may not revoke a 
compensation reduction election after the employee is able currently to 
receive the cash or other taxable amount at the employee's discretion. 
In addition, the election may not be revoked after the beginning of the 
period for which the qualified transportation fringe will be provided.
    (d) Compensation reduction amounts not refundable. Unless an 
election is revoked in a manner consistent with paragraph (c) of this 
Q/A-14, an employee may not subsequently receive the compensation (in 
cash or any form other than by payment of a qualified transportation 
fringe under the employer's plan). Thus, an employer's

[[Page 2248]]

qualified transportation fringe benefit plan may not provide that an 
employee who ceases to participate in the employer's qualified 
transportation fringe benefit plan (such as in the case of termination 
of employment) is entitled to receive a refund of the amount by which 
the employee's compensation reductions exceed the actual qualified 
transportation fringes provided to the employee by the employer.
    (e) Examples. The following examples illustrate the principles of 
this Q/A-14:

    Example 1. (i) Employer P maintains a qualified transportation 
fringe benefit arrangement during a year in which the statutory 
monthly limit is $100 for transportation in a commuter highway 
vehicle and transit passes (2002 or later) and $180 for qualified 
parking. Employees of P are paid cash compensation twice per month, 
with the payroll dates being the first and the fifteenth day of the 
month. Under P's arrangement, an employee is permitted to elect at 
any time before the first day of a month to reduce his or her 
compensation payable during that month in an amount up to the 
applicable statutory monthly limit ($100 if the employee elects 
coverage for transportation in a commuter highway vehicle or a mass 
transit pass, or $180 if the employee chooses qualified parking) in 
return for the right to receive qualified transportation fringes up 
to the amount of the election. If such an election is made, P will 
provide a mass transit pass for that month with a value not 
exceeding the compensation reduction amount elected by the employee 
or will reimburse the cost of other qualified transportation fringes 
used by the employee on or after the first day of that month up to 
the compensation reduction amount elected by the employee. Any 
compensation reduction amount elected by the employee for the month 
that is not used for qualified transportation fringes is not 
refunded to the employee at any future date.
    (ii) In this Example 1, the arrangement satisfies the 
requirements of this Q/A-14 because the election is made before the 
employee is able currently to receive the cash and the election 
specifies the future period for which the qualified transportation 
fringes will be provided. The arrangement would also satisfy the 
requirements of this Q/A-14 and Q/A-13 of this section if employees 
are allowed to elect to reduce compensation up to $280 per month 
($100 plus $180).
    (iii) The arrangement would also satisfy the requirements of 
this Q/A-14 (and Q/A-13 of this section) if employees are allowed to 
make an election at any time before the first or the fifteenth day 
of the month to reduce their compensation payable on that payroll 
date by an amount not in excess of one-half of the applicable 
statutory monthly limit (depending on the type of qualified 
transportation fringe elected by the employee) and P provides a mass 
transit pass on or after the applicable payroll date for the 
compensation reduction amount elected by the employee for the 
payroll date or reimburses the cost of other qualified 
transportation fringes used by the employee on or after the payroll 
date up to the compensation reduction amount elected by the employee 
for that payroll date.
    Example 2. (i) Employee Q elects to reduce his compensation 
payable on March 1 of a year (for which the statutory monthly mass 
transit limit is $65) by $195 in exchange for a mass transit voucher 
to be provided in March. The election is made on the preceding 
February 27. Employee Q was hired in January of the year. On March 
10 of the year, the employer of Employee Q delivers to Employee Q a 
mass transit voucher worth $195 for the months of January, February, 
and March.
    (ii) In this Example 2, $65 is included in Employee Q's wages 
for income and employment tax purposes because the compensation 
reduction election fails to satisfy the requirement in this Q/A-14 
and Q/A-12 of this section that the period for which the qualified 
transportation fringe will be provided not begin before the election 
is made to the extent the election relates to $65 worth of transit 
passes for January of the year. The $65 for February is not taxable 
because the election was for a future period that includes at least 
one day in February.
    (iii) However, no amount would be included in Employee Q's wages 
as a result of the election if $195 worth of mass transit passes 
were instead provided to Q for the months of February, March, and 
April (because the compensation reduction would relate solely to 
fringes to be provided for a period not beginning before the date of 
the election and the amount provided does not exceed the aggregate 
limit for the period, i.e., the sum of $65 for each of February, 
March, and April). See Q/A-9 of this section for rules governing 
transit passes distributed in advance for more than one month.
    Example 3. (i) Employee R elects to reduce his compensation 
payable on March 1 of a year (for which the statutory monthly 
parking limit is $175) by $185 in exchange for reimbursement by 
Employer T of parking expenses incurred by Employee R for parking on 
or near Employer T's business premises during the period beginning 
after the date of the election through March. The election is made 
on the preceding February 27. Employee R incurs $10 in parking 
expenses on February 28 of the year, and $175 in parking expenses 
during the month of March. On April 5 of the year, Employer T 
reimburses Employee R $185 for the parking expenses incurred on 
February 28, and during March, of the year.
    (ii) In this Example 3, no amount would be includible in 
Employee R's wages for income and employment tax purposes because 
the compensation reduction related solely to parking on or near 
Employer R's business premises used during a period not beginning 
before the date of the election and the amount reimbursed for 
parking used in any one month does not exceed the statutory monthly 
limitation.
    Q-15. May an employee whose qualified transportation fringe costs 
are less than the employee's compensation reduction carry over this 
excess amount to subsequent periods?
    A-15. (a) Yes. An employee may carry over unused compensation 
reduction amounts to subsequent periods under the plan of the 
employee's employer.
    (b) The following example illustrates the principles of this Q/A-
15:

    Example. (i) By an election made before November 1 of a year for 
which the statutory monthly mass transit limit is $65, Employee E 
elects to reduce compensation in the amount of $65 for the month of 
November. E incurs $50 in employee-operated commuter highway vehicle 
expenses during November for which E is reimbursed $50 by Employer 
R, E's employer. By an election made before December, E elects to 
reduce compensation by $65 for the month of December. E incurs $65 
in employee-operated commuter highway vehicle expenses during 
December for which E is reimbursed $65 by R. Before the following 
January, E elects to reduce compensation by $50 for the month of 
January. E incurs $65 in employee-operated commuter highway vehicle 
expenses during January for which E is reimbursed $65 by R because R 
allows E to carry over to the next year the $15 amount by which the 
compensation reductions for November and December exceeded the 
employee-operated commuter highway vehicle expenses incurred during 
those months.
    (ii) In this Example, because Employee E is reimbursed in an 
amount not exceeding the applicable statutory monthly limit, and the 
reimbursement does not exceed the amount of employee-operated 
commuter highway vehicle expenses incurred during the month of 
January, the amount reimbursed ($65) is excludable from E's wages 
for income and employment tax purposes.

    Q-16. How does section 132(f) apply to expense reimbursements?
    A-16. (a) In general. The term qualified transportation fringe 
includes cash reimbursement by an employer to an employee for expenses 
incurred or paid by an employee for transportation in a commuter 
highway vehicle or qualified parking. The term qualified transportation 
fringe also includes cash reimbursement for transit passes made under a 
bona fide reimbursement arrangement, but, in accordance with section 
132(f)(3), only if permitted under paragraph (b) of this Q/A-16. The 
reimbursement must be made under a bona fide reimbursement arrangement 
which meets the rules of paragraph (c) of this Q/A-16. A payment made 
before the date an expense has been incurred or paid is not a 
reimbursement. In addition, a bona fide reimbursement arrangement does 
not include an arrangement that is dependent solely upon an employee 
certifying in advance that the employee will incur expenses at some 
future date.
    (b) Special rule for transit passes--(1) In general. The term 
qualified transportation fringe includes cash reimbursement for transit 
passes made

[[Page 2249]]

under a bona fide reimbursement arrangement, but, in accordance with 
section 132(f)(3), only if no voucher or similar item that may be 
exchanged only for a transit pass is readily available for direct 
distribution by the employer to employees. If a voucher is readily 
available, the requirement that a voucher be distributed in-kind by the 
employer is satisfied if the voucher is distributed by the employer or 
by another person on behalf of the employer (for example, if a transit 
operator credits amounts to the employee's fare card as a result of 
payments made to the operator by the employer).
    (2) Voucher or similar item. For purposes of the special rule in 
paragraph (b) of this Q/A-16, a transit system voucher is an instrument 
that may be purchased by employers from a voucher provider that is 
accepted by one or more mass transit operators (e.g., train, subway, 
and bus) in an area as fare media or in exchange for fare media. Thus, 
for example, a transit pass that may be purchased by employers directly 
from a voucher provider is a transit system voucher.
    (3) Voucher provider. The term voucher provider means any person in 
the trade or business of selling transit system vouchers to employers, 
or any transit system or transit operator that sells vouchers to 
employers for the purpose of direct distribution to employees. Thus, a 
transit operator might or might not be a voucher provider. A voucher 
provider is not, for example, a third-party employee benefits 
administrator that administers a transit pass benefit program for an 
employer using vouchers that the employer could obtain directly.
    (4) Readily available. For purposes of this paragraph (b), a 
voucher or similar item is readily available for direct distribution by 
the employer to employees if and only if an employer can obtain it from 
a voucher provider that--
    (i) does not impose fare media charges that cause vouchers to not 
be readily available as described in paragraph (b)(5) of this section; 
and
    (ii) does not impose other restrictions that cause vouchers to not 
be readily available as described in paragraph (b)(6) of this section.
    (5) Fare media charges. For purposes of paragraph (b)(4) of this 
section, fare media charges relate only to fees paid by the employer to 
voucher providers for vouchers. The determination of whether obtaining 
a voucher would result in fare media charges that cause vouchers to not 
be readily available as described in this paragraph (b) is made with 
respect to each transit system voucher. If more than one transit system 
voucher is available for direct distribution to employees, the employer 
must consider the fees imposed for the lowest cost monthly voucher for 
purposes of determining whether the fees imposed by the voucher 
provider satisfy this paragraph. However, if transit system vouchers 
for multiple transit systems are required in an area to meet the 
transit needs of the individual employees in that area, the employer 
has the option of averaging the costs applied to each transit system 
voucher for purposes of determining whether the fare media charges for 
transit system vouchers satisfy this paragraph. Fare media charges are 
described in this paragraph (b)(5), and therefore cause vouchers to not 
be readily available, if and only if the average annual fare media 
charges that the employer reasonably expects to incur for transit 
system vouchers purchased from the voucher provider (disregarding 
reasonable and customary delivery charges imposed by the voucher 
provider, e.g., not in excess of $15) are more than 1 percent of the 
average annual value of the vouchers for a transit system.
    (6) Other restrictions. For purposes of paragraph (b)(4) of this 
section, restrictions that cause vouchers to not be readily available 
are restrictions imposed by the voucher provider other than fare media 
charges that effectively prevent the employer from obtaining vouchers 
appropriate for distribution to employees. Examples of such 
restrictions include--
    (i) Advance purchase requirements. Advance purchase requirements 
cause vouchers to not be readily available only if the voucher provider 
does not offer vouchers at regular intervals or fails to provide the 
voucher within a reasonable period after receiving payment for the 
voucher. For example, a requirement that vouchers may be purchased only 
once per year may effectively prevent an employer from obtaining 
vouchers for distribution to employees. An advance purchase requirement 
that vouchers be purchased not more frequently than monthly does not 
effectively prevent the employer from obtaining vouchers for 
distribution to employees.
    (ii) Purchase quantity requirements. Purchase quantity requirements 
cause vouchers to not be readily available if the voucher provider does 
not offer vouchers in quantities that are reasonably appropriate to the 
number of the employer's employees who use mass transportation (for 
example, the voucher provider requires a $1,000 minimum purchase and 
the employer seeks to purchase only $200 of vouchers).
    (iii) Limitations on denominations of vouchers that are available. 
If the voucher provider does not offer vouchers in denominations 
appropriate for distribution to the employer's employees, vouchers are 
not readily available. For example, vouchers provided in $5 increments 
up to the monthly limit are appropriate for distribution to employees, 
while vouchers available only in a denomination equal to the monthly 
limit are not appropriate for distribution to employees if the amount 
of the benefit provided to the employer's employees each month is 
normally less than the monthly limit.
    (7) Example. The following example illustrates the principles of 
this paragraph (b):

    Example. (i) Company C in City X sells mass transit vouchers to 
employers in the metropolitan area of X in various denominations 
appropriate for distribution to employees. Employers can purchase 
vouchers monthly in reasonably appropriate quantities. Several 
different bus, rail, van pool, and ferry operators service X, and a 
number of the operators accept the vouchers either as fare media or 
in exchange for fare media. To cover its operating expenses, C 
imposes on each voucher a 50 cents charge, plus a reasonable and 
customary $15 charge for delivery of each order of vouchers. 
Employer M disburses vouchers purchased from C to its employees who 
use operators that accept the vouchers and M reasonably expects that 
$55 is the average value of the voucher it will purchase from C for 
the next calendar year.
    (ii) In this Example, vouchers for X are readily available for 
direct distribution by the employer to employees because the 
expected cost of the vouchers disbursed to M's employees for the 
next calendar year is not more than 1 percent of the value of the 
vouchers (50 cents divided by $55 equals 0.91 percent), the delivery 
charges are disregarded because they are reasonable and customary, 
and there are no other restrictions that cause the vouchers to not 
be readily available. Thus, any reimbursement of mass transportation 
costs in X would not be a qualified transportation fringe.

    (c) Substantiation requirements. Employers that make cash 
reimbursements must establish a bona fide reimbursement arrangement to 
establish that their employees have, in fact, incurred expenses for 
transportation in a commuter highway vehicle, transit passes, or 
qualified parking. For purposes of section 132(f), whether cash 
reimbursements are made under a bona fide reimbursement arrangement may 
vary depending on the facts and circumstances, including the method or 
methods of payment utilized within the mass transit system. The

[[Page 2250]]

employer must implement reasonable procedures to ensure that an amount 
equal to the reimbursement was incurred for transportation in a 
commuter highway vehicle, transit passes, or qualified parking. The 
expense must be substantiated within a reasonable period of time. An 
expense substantiated to the payor within 180 days after it has been 
paid will be treated as having been substantiated within a reasonable 
period of time. An employee certification at the time of reimbursement 
in either written or electronic form may be a reasonable reimbursement 
procedure depending on the facts and circumstances. Examples of 
reasonable reimbursement procedures are set forth in paragraph (d) of 
this Q/A-16.
    (d) Illustrations of reasonable reimbursement procedures. The 
following are examples of reasonable reimbursement procedures for 
purposes of paragraph (c) of this Q/A-16. In each case, the 
reimbursement is made at or within a reasonable period after the end of 
the events described in paragraphs (d)(1) through (d)(3) of this 
section.
    (1) An employee presents to the employer a parking expense receipt 
for parking on or near the employer's business premises, the employee 
certifies that the parking was used by the employee, and the employer 
has no reason to doubt the employee's certification.
    (2) An employee either submits a used time-sensitive transit pass 
(such as a monthly pass) to the employer and certifies that he or she 
purchased it or presents an unused or used transit pass to the employer 
and certifies that he or she purchased it and the employee certifies 
that he or she has not previously been reimbursed for the transit pass. 
In both cases, the employer has no reason to doubt the employee's 
certification.
    (3) If a receipt is not provided in the ordinary course of business 
(e.g., if the employee uses metered parking or if used transit passes 
cannot be returned to the user), the employee certifies to the employer 
the type and the amount of expenses incurred, and the employer has no 
reason to doubt the employee's certification.
    Q-17. May an employer provide nontaxable cash reimbursement under 
section 132(f) for periods longer than one month?
    A-17. (a) General rule. Yes. Qualified transportation fringes 
include reimbursement to employees for costs incurred for 
transportation in more than one month, provided the reimbursement for 
each month in the period is calculated separately and does not exceed 
the applicable statutory monthly limit for any month in the period. See 
Q/A-8 and 9 of this section if the limit for a month is exceeded.
    (b) Example. The following example illustrates the principles of 
this Q/A-17:

    Example. (i) Employee R pays $100 per month for qualified 
parking used during the period from April 1 through June 30 of a 
year in which the statutory monthly qualified parking limit is $175. 
After receiving adequate substantiation from Employee R, R's 
employer reimburses R $300 in cash on June 30 of that year.
    (ii) In this Example, because the value of the reimbursed 
expenses for each month did not exceed the applicable statutory 
monthly limit, the $300 reimbursement is excludable from R's wages 
for income and employment tax purposes as a qualified transportation 
fringe.

    Q-18. What are the substantiation requirements if an employer 
distributes transit passes?
    A-18. There are no substantiation requirements if the employer 
distributes transit passes. Thus, an employer may distribute a transit 
pass for each month with a value not more than the statutory monthly 
limit without requiring any certification from the employee regarding 
the use of the transit pass.
    Q-19. May an employer choose to impose substantiation requirements 
in addition to those described in this regulation?
    A-19. Yes.
    Q-20. How is the value of parking determined?
    A-20. Section 1.61-21(b)(2) applies for purposes of determining the 
value of parking.
    Q-21. How do the qualified transportation fringe rules apply to van 
pools?
    A-21. (a) Van pools generally. Employer and employee-operated van 
pools, as well as private or public transit-operated van pools, may 
qualify as qualified transportation fringes. The value of van pool 
benefits which are qualified transportation fringes may be excluded up 
to the applicable statutory monthly limit for transportation in a 
commuter highway vehicle and transit passes, less the value of any 
transit passes provided by the employer for the month.
    (b) Employer-operated van pools. The value of van pool 
transportation provided by or for an employer to its employees is 
excludable as a qualified transportation fringe, provided the van 
qualifies as a commuter highway vehicle as defined in section 
132(f)(5)(B) and Q/A-2 of this section. A van pool is operated by or 
for the employer if the employer purchases or leases vans to enable 
employees to commute together or the employer contracts with and pays a 
third party to provide the vans and some or all of the costs of 
operating the vans, including maintenance, liability insurance and 
other operating expenses.
    (c) Employee-operated van pools. Cash reimbursement by an employer 
to employees for expenses incurred for transportation in a van pool 
operated by employees independent of their employer are excludable as 
qualified transportation fringes, provided that the van qualifies as a 
commuter highway vehicle as defined in section 132(f)(5)(B) and Q/A-2 
of this section. See Q/A-16 of this section for the rules governing 
cash reimbursements.
    (d) Private or public transit-operated van pool transit passes. The 
qualified transportation fringe exclusion for transit passes is 
available for travel in van pools owned and operated either by public 
transit authorities or by any person in the business of transporting 
persons for compensation or hire. In accordance with paragraph (b) of 
Q/A-3 of this section, the van must seat at least 6 adults (excluding 
the driver). See Q/A-16(b) and (c) of this section for a special rule 
for cash reimbursement for transit passes and the substantiation 
requirements for cash reimbursement.
    (e) Value of van pool transportation benefits. Section 1.61-
21(b)(2) provides that the fair market value of a fringe benefit is 
based on all the facts and circumstances. Alternatively, transportation 
in an employer-provided commuter highway vehicle may be valued under 
the automobile lease valuation rule in Sec. 1.61-21(d), the vehicle 
cents-per-mile rule in Sec. 1.61-21(e), or the commuting valuation rule 
in Sec. 1.61-21(f). If one of these special valuation rules is used, 
the employer must use the same valuation rule to value the use of the 
commuter highway vehicle by each employee who share the use. See 
Sec. 1.61-21(c)(2)(i)(B).
    (f) Qualified parking prime member. If an employee obtains a 
qualified parking space as a result of membership in a car or van pool, 
the applicable statutory monthly limit for qualified parking applies to 
the individual to whom the parking space is assigned. This individual 
is the prime member. In determining the tax consequences to the prime 
member, the statutory monthly limit amounts of each car pool member may 
not be combined. If the employer provides access to the space and the 
space is not assigned to a particular individual, then the employer 
must designate one of its employees as the prime member who will bear 
the tax consequences. The employer may not designate more than one 
prime member for a car or van pool during a month.

[[Page 2251]]

The employer of the prime member is responsible for including the value 
of the qualified parking in excess of the statutory monthly limit in 
the prime member's wages for income and employment tax purposes.
    Q-22. What are the reporting and employment tax requirements for 
qualified transportation fringes?
    A-22. (a) Employment tax treatment generally. Qualified 
transportation fringes not exceeding the applicable statutory monthly 
limit described in Q/A-7 of this section are not wages for purposes of 
the Federal Insurance Contributions Act (FICA), the Federal 
Unemployment Tax Act (FUTA), and federal income tax withholding. Any 
amount by which an employee elects to reduce compensation as provided 
in Q/A-11 of this section is not subject to the FICA, the FUTA, and 
federal income tax withholding. Qualified transportation fringes 
exceeding the applicable statutory monthly limit described in Q/A-7 of 
this section are wages for purposes of the FICA, the FUTA, and federal 
income tax withholding and are reported on the employee's Form W-2, 
Wage and Tax Statement.
    (b) Employment tax treatment of cash reimbursement exceeding 
monthly limits. Cash reimbursement to employees (for example, cash 
reimbursement for qualified parking) in excess of the applicable 
statutory monthly limit under section 132(f) is treated as paid for 
employment tax purposes when actually or constructively paid. See 
Secs. 31.3121(a)-2(a), 31.3301-4, 31.3402(a)-1(b) of this chapter. 
Employers must report and deposit the amounts withheld in addition to 
reporting and depositing other employment taxes. See Q/A-16 of this 
section for rules governing cash reimbursements.
    (c) Noncash fringe benefits exceeding monthly limits. If the value 
of noncash qualified transportation fringes exceeds the applicable 
statutory monthly limit, the employer may elect, for purposes of the 
FICA, the FUTA, and federal income tax withholding, to treat the 
noncash taxable fringe benefits as paid on a pay period, quarterly, 
semi-annual, annual, or other basis, provided that the benefits are 
treated as paid no less frequently than annually.
    Q-23. How does section 132(f) interact with other fringe benefit 
rules?
    A-23. For purposes of section 132, the terms working condition 
fringe and de minimis fringe do not include any qualified 
transportation fringe under section 132(f). If, however, an employer 
provides local transportation other than transit passes (without any 
direct or indirect compensation reduction election), the value of the 
benefit may be excludable, either totally or partially, under fringe 
benefit rules other than the qualified transportation fringe rules 
under section 132(f). See Secs. 1.132-6(d)(2)(i) (occasional local 
transportation fare), 1.132-6(d)(2)(iii) (transportation provided under 
unusual circumstances), and 1.61-21(k) (valuation of local 
transportation provided to qualified employees). See also Q/A-4(b) of 
this section.
    Q-24. May qualified transportation fringes be provided to 
individuals who are partners, 2-percent shareholders of S-corporations, 
or independent contractors?
    A-24. (a) General rule. Section 132(f)(5)(E) states that self-
employed individuals who are employees within the meaning of section 
401(c)(1) are not employees for purposes of section 132(f). Therefore, 
individuals who are partners, sole proprietors, or other independent 
contractors are not employees for purposes of section 132(f). In 
addition, under section 1372(a), 2-percent shareholders of S 
corporations are treated as partners for fringe benefit purposes. Thus, 
an individual who is both a 2-percent shareholder of an S corporation 
and a common law employee of that S corporation is not considered an 
employee for purposes of section 132(f). However, while section 132(f) 
does not apply to individuals who are partners, 2-percent shareholders 
of S corporations, or independent contractors, other exclusions for 
working condition and de minimis fringes may be available as described 
in paragraphs (b) and (c) of this Q/A-24. See Secs. 1.132-1(b)(2) and 
1.132-1(b)(4).
    (b) Transit passes. The working condition and de minimis fringe 
exclusions under section 132(a)(3) and (4) are available for transit 
passes provided to individuals who are partners, 2-percent 
shareholders, and independent contractors. For example, tokens or 
farecards provided by a partnership to an individual who is a partner 
that enable the partner to commute on a public transit system (not 
including privately-operated van pools) are excludable from the 
partner's gross income if the value of the tokens and farecards in any 
month does not exceed the dollar amount specified in Sec. 1.132-
6(d)(1). However, if the value of a pass provided in a month exceeds 
the dollar amount specified in Sec. 1.132-6(d)(1), the full value of 
the benefit provided (not merely the amount in excess of the dollar 
amount specified in Sec. 1.132-6(d)(1)) is includible in gross income.
    (c) Parking. The working condition fringe rules under section 
132(d) do not apply to commuter parking. See Sec. 1.132-5(a)(1). 
However, the de minimis fringe rules under section 132(e) are available 
for parking provided to individuals who are partners, 2-percent 
shareholders, or independent contractors that qualifies under the de 
minimis rules. See Sec. 1.132-6(a) and (b).
    (d) Example. The following example illustrates the principles of 
this Q/A-24:

    Example. (i) Individual G is a partner in partnership P. 
Individual G commutes to and from G's office every day and parks 
free of charge in P's lot.
    (ii) In this Example, the value of the parking is not excluded 
under section 132(f), but may be excluded under section 132(e) if 
the parking is a de minimis fringe under Sec. 1.132-6.

    Q-25. What is the effective date of this section?
    A-25. (a) Except as provided in paragraph (b) of this Q/A-25, this 
section is applicable for taxable years beginning after December 31, 
2001.
    (b) The last sentence of paragraph (b)(5) of Q/A-16 of this section 
(relating to whether transit system vouchers for transit passes are 
readily available) is effective for taxable years beginning after 
December 31, 2003.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 5. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 6. In Sec. 602.101, paragraph (b) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b)

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.132-9(b)..............................................       1545-1676
 
                  *        *        *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: December 29, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-294 Filed 1-10-01; 8:45 am]
BILLING CODE 4830-01-P