In Revenue Ruling 2014-32, the IRS provided guidance on the use of smartcard, debit or credit cards, or other electronic media to provide transportation fringe benefits to employees.  Such programs qualify under IRC §132 to be excluded from the income of the employee.

But what happens if, when the employee goes to use the card or device, it malfunctions, not allowing them to board the train or bus?  Quite often an employee, not wanting to be late, will simply pay for the ticket him/herself rather than attempting to resolve the matter with customer service for the transit authority, assuming that is even a possibility.  If the employee asks the employer to reimburse him/her for the fare, can that be excluded from the employee’s income?

In CCA 201949019[1] the IRS takes a relatively hard line on this situation, though the ruling does explain cases where the employer could reimburse the fare without including it in the employee’s wages.

The advice begins by describing the transit programs approved by Revenue Ruling 2014-32:

Revenue Ruling 2014-32, 2014-2 C.B. 917, provides guidance on the use of smartcards, debit or credit cards, or other electronic media to provide qualified transportation fringe benefits to employees. MCC-restricted debit cards constitute “transit passes” within the meaning of section 132(f)(5)(A) and Treas. Reg. § 1.132-9(b), Q/A-3 as long as the value stored on the cards is usable only as fare media for transit systems or to purchase only fare media for transit systems. Both the * * * debit card and the * * * card constitute “transit passes” within the meaning of section 132(f)(5)(A) and Treas. Reg. § 1.132-9(b) Q/A-3 because the value stored on the cards is usable only as fare media for transit systems or to purchase fare media for transit systems.

The * * * is required to use the * * * debit card and the * * * card in lieu of cash reimbursement to provide transit benefits to its employees as long as the card and the * * * debit card are readily available within the meaning of section 132(f)(3) and Treas. Reg. § 1.132-9(b) Q/A-16(b). Treas. Reg. § 1.132-9(b) Q/A-16(b)(4) and (b)(6) provide that a voucher or similar item is “readily available” for direct distribution by the employer to employees if and only if the employer can obtain it from a provider that does not impose “restrictions” that “effectively prevent the employer from obtaining vouchers for distribution to employees.”[2]

The issue of what is “readily available” will be the key issue the IRS will keep coming back to in this advice.

The advice notes that things like a timing delay can create a situation where the item is not available and reimbursement can be acceptable:

Voucher providers may impose a timing delay on the purchase of transit passes by the * * * for its employees’ use. For example, the voucher provider may require the * * * to only enroll new participants on a certain day of the month. Similarly, voucher providers may require a certain amount of time to prepare and issue a voucher/debit card to new employees and this may prevent the * * * from providing the voucher to the employee immediately when the employee begins work. It’s possible that other circumstances may exist under which the voucher provider delays the provision of a transit pass to the * * * for providing to its employees. Under these limited circumstances, provided that the substantiation procedures in Treas. Reg. § 1.132-9(b), Q/A-16(c) are satisfied, the * * * may provide qualified transportation fringe benefits through cash reimbursements. [3]

However, the advice finds the situation is different where the employee has a card or device that simply malfunctions—as the benefit is available but just, in the view of the IRS, not used:

However, when an employer provides a * * * or * * * card to the employee, the benefit is considered provided. Accordingly, malfunctions in the card (e.g., chip stops working) or malfunctions in the system reading the card (e.g., card reader goes down during commute) do not mean that the transit pass was not readily available to the employer for distribution within the meaning of section 132(f)(3). One would expect in these circumstances that the employee would contact the transportation provider to have the malfunction remedied or to provide the transportation. Since the employee has a valid card, it would be the transportation system’s responsibility to honor the card and address possible technical malfunctions. The card need only entitle the employee to the benefit, and there is no requirement in the Code and its regulations that the employee ultimately avail him or herself of the transit benefit or that the benefit be available at any time for the employee’s use. For example, if an employee missed the van pool and was not able to recuperate the lost trip, the voucher for the van pool rides would still have been provided. [4]

This leads the IRS to the following conclusion in the main body of the advice:

Thus, cash reimbursements for expenses incurred in the use of transit due to malfunctioning cards or systems are not qualified transportation fringe benefits, and the value of any cash reimbursements provided for such expenses is included in the employee’s income and is included in wages subject to FICA, FUTA, and income tax withholding. [5]

In a footnote, the IRS does provide for a limited exception to this holding:

If the * * * or * * * card provided to the employer by the voucher provider (and subsequently distributed by the employer to the employee) is not a functioning card, thereby creating a delay caused by the voucher provider in the distribution of a functioning card, we believe that situation may also be acceptably viewed as one in which the transit pass or voucher was not readily available for distribution. Accordingly, provided that the substantiation procedures in Treas. Reg. § 1.132-9(b), Q/A-16(c) are satisfied, the * * * may provide qualified transportation fringe benefits through cash reimbursements. [6]

[1] Chief Counsel Advice 201949019, December 6, 2019, https://www.irs.gov/pub/irs-wd/201949019.pdf (retrieved December 8, 2019)

[2] Chief Counsel Advice 201949019, pp. 1-2

[3] Chief Counsel Advice 201949019, p. 2

[4] Chief Counsel Advice 201949019, pp. 2-3

[5] Chief Counsel Advice 201949019, p. 3

[6] Chief Counsel Advice 201949019, pp. 2-3