QUESTION: Our company’s qualified transportation plan allows employees to purchase transit passes with pre-tax compensation. Passes are distributed directly to employees; cash reimbursements are not allowed. Should we require substantiation or certification that an employee is using the pass to get to work?
ANSWER: The Code provision authorizing qualified transportation plans indicates that the tax benefits under a qualified transportation plan are for “employees.” And unlike the rules governing some other fringe benefits (e.g., de minimis fringe benefits), the qualified transportation plan rules limit the term “employee” to common-law employees and certain statutory employees. The term does not include family members or others. But neither the Code nor the regulations expressly limit what an employee can do with a transit pass after it is received from a qualified transportation plan. In fact, the regulations clearly state that “[t]here are no substantiation requirements if the employer distributes transit passes.” Consequently, absent knowledge of misuse (see below), your company need not require substantiation or obtain certifications from employees to demonstrate that transit passes were used for commuting.
While the absence of a substantiation obligation makes it unlikely that a plan’s tax-favored status would be jeopardized by what employees do with transit passes after receiving them, the outcome might be different if there were evidence the employer knew that passes were not being used by employees and did nothing about it. If you learn that some employees are giving away or selling their transit passes, you should consult with benefits counsel regarding whether your plan should expressly prohibit those practices, and whether additional measures should be taken to discourage abuse of the benefit. These measures might include requiring employees to certify that they are using their transit passes for their own commuting purposes, comparing transit routes to employees’ commutes, and checking recipients of transit passes against parking benefit records.
You mention that the plan is funded entirely by pre-tax compensation reductions. But if your company now or in the future subsidizes the cost of the transit passes, you will want to make sure that the subsidy is being used for its intended purpose. For example, some companies are subsidizing transit benefits to entice reluctant employees out of their homes and back to the office after the COVID pandemic. This purpose may be undermined if there are no apparent consequences for selling the passes and pocketing the subsidy (and the tax savings). Requiring a certification would be a simple way to discourage abuse of the benefit and might also help assure that your company maximizes the return on its investment in the plan.
For more information, see EBIA’s Fringe Benefits manual at Sections XX.E.4 (“Can Employees Let Spouses, Dependents, or Friends Use Vouchers Provided Directly to the Employee by the Employer?”) and XX.U (“Consequences of Noncompliance”).
Contributing Editors: EBIA Staff.