Joint Committee Report Got It Wrong, As Congress Failed to Authorize Lump Sum Reimbursement of Retroactively Increased Transit Benefit
Congress has reinstated the higher level of exclusion for employer provided transit benefits under IRC §132(f) the last three times the provision has expired, but did so only at or after the end of the year following the expiration of the provision.
Employers who had structured their programs to limit their assistance to the amount that was provided for in the Code during the year in question, but which retroactively was raised by Congress, may wonder if they could make a payment to reimburse those employees who had paid additional costs out of pocket during those years and exclude them from income. If the employers have read the explanations of these laws provided by the Joint Committee on Taxation which indicates that Congress intended to allow such reimbursements when it passed these bills, then the question becomes of even more interest.
Some employers, in fact, made such inquiries to the IRS and in Program Manager Technical Advice 2016-01 the IRS responded that, no, any such reimbursements paid may not be retroactively excluded from income.
Generally IRC §132(f) discusses theprovision of transit passes for employees. However cash reimbursement for transit passes (as opposed to distribution of the passes) is restricted under IRC §132(f)(3) which provides that an exclusion for cash reimbursement of transit passes is available only “to a cash reimbursement for any transit pass 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.”
As the ruling notes, such vouchers are considered readily available under the following standard:
A voucher or similar item is readily available for direct distribution by an employer to employees if and only if the employer can obtain it from a voucher provider that does not impose fare media charges greater than 1 percent of the average annual value of the voucher for a transit system, and does not impose other restrictions causing the voucher not to be considered readily available [Section 1.132-9(b) Q/A-16(b)(4)].
If transit passes are readily available in the employer’s area, the Code does not provide an income or employment tax exclusion for transit benefits paid to employees in cash. We understand that in many cases transit passes are readily available in the areas about which employers are asking questions. In such cases, any distribution of cash to employees would be wages to the employee and subject to federal income tax withholding and reporting, including distributions provided due to the retroactive increase in the maximum amount of the excludable transit benefit.
Thus, clearly no cash “make-up” distribution would be available in this case since an original cash distribution would not have been excludable.
If the benefits were not available the problem then is described below:
If transit passes were not readily available in an area such that employers were permitted to provide transit benefits in the form of cash reimbursements, such benefits must be provided under a bona fide reimbursement arrangement for expenses actually incurred and substantiated by employees, as described in § 1.132-9 Q/A 16(c).
As well, the IRS notes that even if a “late” payment could be justified, it still would be limited in the month of payment to the amount available for that month:
Furthermore, as noted above, § 132(f)(2) limits the amount that can be provided by an employer to an employee per month on a tax-free basis. That amount is $255 for 2016. Any amount an employer provides in excess of that statutory monthly limit is not excludible under § 132, even if provided due to the increase in the monthly excludable amount for 2012, 2014 or 2015. Such excess amounts in 2016 would be wages to the employee and subject to employment tax withholding and reporting.
There is one complicating factor that the employers point to—the Joint Committee on Taxation reports explaining these bills have indicated that Congress intended to allow retroactive cash payments. The ruling quotes from the Joint Committee on Taxation’s General Explanation of Tax Legislation Enacted in the 112th Congress which dealt with the first such extension which stated:
In order for the extension to be effective retroactive to January 1, 2012, expenses incurred during 2012 by an employee for employer-provided vanpool and transit benefits may be reimbursed (under a bona fide reimbursement arrangement) by employers on a tax-free basis to the extent they exceed $125 per month and are less than $240 per month. Congress intends that the rule that an employer reimbursement is excludible only if vouchers are not available to provide the benefit shall continue to apply, except in the case of reimbursements for vanpool or transit benefits between $125 and $240 for months during 2012. Further, Congress intends that reimbursements for expenses incurred for months during 2012 may be made in addition to the provision of benefits or reimbursements of up to $245 per month for expenses incurred during 2013. (JCS-2-13)
Similar language can be found in reports related to the other two extensions.
That language is clear, so shouldn’t employers be able to pay tax free reimbursements?
No, the IRS states. The problem is that while the committee reports may clearly state that a retroactive payment is intended those reports don’t override the law that Congress actually enacted. That law makes no provision for a payment in cash or reimbursements outside the very limited situations allowed for in IRC §132(f)(3)(C).
If the law itself is unambiguous, then it doesn’t matter what the legislative history says, as in the end it is the law which was directly voted upon by Congress. Only if the law is ambiguous is it permissible to turn to sources other than the law to derive how Congress intended the provision to be read.
But, as the IRS notes:
In this case, the statutory text is clear. Congress changed the amount of the monthly statutory limit but did not change any other requirements of § 132. There is no need to look to the legislative history. In addition, neither the Joint Committee on Taxation’s General Explanation of Tax Legislation, nor the Joint Committee on Taxation’s Technical Explanation of the Protecting Americans from Tax Hikes Act of 2105, while they may be of value, are considered to be legislative history.
Note that this doesn’t affect employers who provided transit passes with a cost in excess of the originally allowed exclusion, including the excess in the employee’s compensation originally. Those employers are allowed (and in fact generally have to) go back and treat those excess amounts up to the revised limits as nontaxable, revising the employee’s FICA and Medicare withholdings.
Similarly, an employer that had qualified reimbursements under §132(f)(3), but who reimbursed the higher amount originally (including it in the employee’s income at the time and subjecting it to FICA and Medicare withholding) also would not be impacted. Rather it’s those that provided vouchers limited to the lower amount or capped reimbursements at the lower amounts that the IRS has announced it believes are “out of luck” in terms of allowing employees to take advantage of the retroactive fixes.