The IRS has released an information letter responding to an inquiry from a qualified transportation plan participant whose employer decided to let him work from home permanently due to the COVID-19 pandemic. To avoid losing compensation reduction amounts he had previously set aside for parking, the participant asked whether his unused compensation reductions could be transferred to a health FSA under a cafeteria plan.
The letter explains that unused compensation reduction amounts under an employer’s qualified transportation plan can be carried over to subsequent periods under the plan and used for future commuting expenses, so long as the employee does not receive benefits that exceed the maximum excludable amount in any month. But cash refunds are not permitted, even to employees whose compensation reduction amounts exceed their need for qualified transportation fringe benefits. Furthermore, the Code prohibits cafeteria plans from offering qualified transportation fringe benefits, and IRS rules do not permit unused compensation reduction amounts under a qualified transportation plan to be transferred to a health FSA under a cafeteria plan. The letter also notes that COVID-19-related relief for FSAs gives employers the discretion to amend their cafeteria plans to permit midyear health FSA election changes for plan years ending in 2021 (see our Checkpoint article).
EBIA Comment: The qualified transportation rules have proven sufficiently flexible to handle most situations resulting from the COVID-19 emergency (see, e.g., our Checkpoint article). Most employers permit benefit election changes at least monthly, and plans can allow current participants to carry over unused balances indefinitely. Compensation reductions set aside for one qualified transportation benefit (e.g., parking) can even be used for a different transportation benefit (e.g., transit) if the plan permits and the maximum monthly benefit is not exceeded. But—as this participant’s request to transfer parking compensation reductions to a health FSA suggests—those options are not always sufficient. Because some risk of loss due to changing circumstances is unavoidable, employers should clearly articulate that risk to employees before they make compensation reduction elections. For more information, see EBIA’s Fringe Benefits manual at Sections XX.O (“Compensation Reduction Elections”) and XX.P (“Carryovers Allowed for Current Participants: Former Participants Cannot Have Unused Amounts Refunded”). See also EBIA’s Cafeteria Plans manual at Sections X.C (“Benefits That Cannot Be Offered Under a Cafeteria Plan”) and XVI.N (“Temporary COVID-19-Related Relief for Cafeteria Plans, Health FSAs, and DCAPs”).
Contributing Editors: EBIA Staff.