Sorry not sorry, says the IRS on refunds of qualified transportation balances

The IRS has published a bulletin to clarify already well-known qualified transportation plan provisions. (1) In a recent letter responding to an employee inquiry, the IRS held their position regarding the distribution of unused funds from a qualified transportation account. The employee claimed that circumstances caused by the COVID-19 pandemic changed their commute resulting in a balance accumulation.

The letter also clarified, contrary to the employee’s reference, that qualified transportation fringe benefits, provided under Section 132, are not provided under a cafeteria plan and are not considered a flexible spending arrangement. These benefits permit the use of funds for qualified expenses, including commuter highway vehicles, transit passes, buses, ferries and qualified parking. These benefits are provided under a compensation reduction agreement where an employee designates a portion of their compensation to go to their qualified transportation fringe benefit provided by the employer. These benefits are permitted to be adjusted periodically and are not locked into the annual enrollment elections that other pre-tax accounts are.

Unused dollars from a qualified transportation fringe benefit can be carried over to subsequent plan year periods and used for future expenses if the employee’s expense does not exceed the monthly maximum amount excludable from taxes. However, refunds on these carryover funds are not permitted – there are no circumstances under which an employer can refund the employee for unused dollars. As the letter reinforced, the same holds true if employees are no longer in need of these funds or are ineligible due to the pandemic event.

But employers can help

So, what is an employer to do? There are some strategic steps that employers can execute to combat the loss of funds for their employees.

1. Educate your employees to have a "save, then spend" mentality.

These accounts are not designed to be savings accounts where employees are stowing away funds. Help your employees by explaining in your materials that these accounts are not intended for future use or savings growth – funds contributed and distributed through the account should fundamentally wash each month.

2. Promote the tax exemption and the risk of forfeiture.

These plans make saving on the work commute a no brainer! But that doesn’t come without the employee responsibility to actively manage month-by-month elections to ensure that there is not an abundance of funds building in the account. You can help your employees by highlighting both aspects.

3. Monitor for balance accumulation.

Receiving monthly reporting from your pre-tax administrator to assess balances and determine who may be saving more than what’s needed in their qualified transportation accounts. A good rule of thumb: watch for balances that exceed the monthly expense limit, currently set to $315 for 2024.

4. Make adjusting the monthly contributions to the plan easy.

Is your enrollment change process hidden in your online enrollment solution? Do you make available other options to change the monthly target for contributions, such as forms or online requests? Make changing elections easy for your employees and situate the change process to be front of mind. Take it a step further by issuing your participants a monthly reminder to check their spending and contribution patterns.

5. Partner with your pre-tax account vendor for additional education.

Work with your qualified transportation account vendor to understand what communication strategies they have at the ready to remind your employees of the importance of monitoring their account balance.

You’re ready to take the initiative and educate your employees about qualified transportation plans. As you prepare your enrollment materials, these insights will empower your employees to make informed decisions when utilizing these plans.

If you have any further questions or need additional assistance, reach out to our professionals today.