[Federal Register Volume 65, Number 18 (Thursday, January 27, 2000)]
[Proposed Rules]
[Pages 4388-4396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1859]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-113572-99]
RIN 1545-AX33


Qualified Transportation Fringe Benefits

AGENCY:  Internal Revenue Service.

ACTION:  Notice of proposed rulemaking and notice of public hearing.

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SUMMARY:  This document contains proposed regulations relating to 
qualified transportation fringe benefits. These proposed regulations 
reflect changes to the law made by the Energy Policy Act of 1992, the 
Taxpayer Relief Act of 1997, and the Transportation Equity Act for the 
21st Century. These proposed regulations affect employers that offer 
qualified transportation fringes and employees who receive these 
benefits. This document also provides notice of a public hearing on 
these proposed regulations.

DATES:  Written and electronic comments must be received by April 26, 
2000. Outlines of topics to be discussed at the public hearing 
scheduled for June 1, 2000 at 10 a.m. must be received by May 10, 2000.

ADDRESSES:  Send submissions to: CC:DOM:CORP:R (REG-113572-99), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
113572-99), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov/tax__regs/reglist.html. 
The public hearing will be held in room 2615, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:  Concerning the proposed regulations, 
John Richards of the Office of Associate Chief Counsel (Employee 
Benefits and Exempt Organizations), (202) 622-6040; concerning 
submissions of comments, the hearing and/or to be placed on the 
building access list to attend the hearing, LaNita Van Dyke, (202) 622-
7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 
20224. Comments on the collection of information should be received by 
March 27, 2000. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collections of information in this proposed regulation are in 
26 CFR 1.132-9(b). This information is required by the Internal Revenue 
Service to implement section 132(f). This information will be used to 
verify compliance with section 132(f). Section 132(f)(3) provides that 
qualified transportation fringes can include cash reimbursement for 
qualified transportation fringes. The proposed regulations require that 
employers keep records of substantiation provided by employees in order 
to receive cash reimbursement for qualified transportation fringes. 
Section 132(f)(4) provides that an employee may choose between cash 
compensation and any qualified transportation fringe. The proposed 
regulations require that employers keep records, in a verifiable form, 
such as written or electronic, of employee elections to reduce 
compensation. The value of qualified transportation fringes provided 
for a month exceeding the applicable statutory monthly limit must be 
reported on the employee's Form W-2. The burden for this requirement is 
reflected in the burden for Form W-2. The likely recordkeepers are 
employers. The likely respondents are employees.
    Estimated total annual recordkeeping burden: 7,020,000 hours.
    Estimated average annual recordkeeping burden per recordkeeper: The 
average annual recordkeeping burden will vary depending on the size of 
the employer. The estimated average annual recordkeeping burden per 
recordkeeper is 26.5 hours.
    Estimated number of recordkeepers: 265,343.
    Estimated total annual reporting burden: 5,948,728 hours.
    Estimated average annual reporting burden per respondent: .8 hours.
    Estimated number of respondents: 7,264,970.
    Estimated annual frequency of responses: Monthly.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget. Books 
or records relating to a collection of information must be retained as 
long as their contents may become material in the administration of any 
internal revenue law. Generally, tax returns and tax return information 
are confidential, as required by 26 U.S.C. 6103.

[[Page 4389]]

Background

    This document contains a proposed amendment to the Income Tax 
Regulations (26 CFR part 1) under section 132(f). Congress amended 
section 132 as part of the Energy Policy Act of 1992, Public Law No. 
102-486, section 1911 (106 Stat. 3012), effective after December 31, 
1992. This provision excludes from gross income the value of any 
qualified transportation fringe provided by an employer to an employee 
to the extent it does not exceed the applicable statutory monthly 
limit.
    This 1992 amendment to section 132 resulted in three changes to the 
tax treatment of employer-provided transportation benefits. First, 
Congress added an exclusion for transportation provided by an employer 
to an employee in a commuter highway vehicle. Second, mass transit 
passes provided by an employer to an employee became excludable as a 
qualified transportation fringe and not as a de minimis fringe. The 
exclusions for transportation provided by an employer to an employee in 
a commuter highway vehicle and mass transit passes were made subject to 
an aggregate $60 per month limit (adjusted for cost of living). Third, 
Congress eliminated the working condition fringe for commuter parking, 
imposed a $150 per month limit (adjusted for cost of living) for the 
exclusion for qualified parking, and provided that employer-provided 
parking is excludable from gross income only as a qualified 
transportation fringe. The 1992 amendment provided that qualified 
transportation fringes could not be provided in lieu of salary.
    Section 1072 of the Taxpayer Relief Act of 1997 (TRA '97), Pub. L. 
No. 105-34 (111 Stat. 948), amended section 132(f), effective for tax 
years beginning after December 31, 1997, to permit qualified parking to 
be provided to employees in lieu of salary. Section 9010 of the 
Transportation Equity Act for the 21st Century (TEA 21), Pub. L. No. 
105-178 (112 Stat. 507), amended section 132(f) to increase the monthly 
dollar limits to $65 for transportation in a commuter highway vehicle 
and mass transit passes\1\ and $175 for qualified parking and to 
provide that, effective after December 31, 1997, any qualified 
transportation fringe may be provided to employees in lieu of salary.
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    \1\ The dollar limit for transportation in a commuter highway 
vehicle and transit passes was further increased to $100 effective 
January 1, 2002.
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Explanation of Provisions

    This document contains proposed regulations under section 132. The 
proposed regulations provide guidance, in question and answer form, to 
employers that provide qualified transportation fringes to employees. 
Qualified transportation fringes consist of transportation in a 
commuter highway vehicle, any transit pass, and qualified parking 
provided by an employer to an employee.
    Notice 94-3, 1994-1 C.B. 327, provided guidance on qualified 
transportation fringes in the form of questions and answers. The 
proposed regulations reflect statutory changes in section 132(f) since 
1994, including the revised monthly dollar limits and the use of bona 
fide salary reduction arrangements, as permitted under TRA '97 and TEA 
21, and generally conform with the guidance in Notice 94-3. In response 
to public comments, the proposed regulations also provided additional 
guidance concerning the standards for determining when the section 
132(f) exclusion applies to cash reimbursement of transit pass 
expenses.
    Section 132(f) limits the value of qualified transportation fringes 
that may be excluded from an employee's gross income. The proposed 
regulations explain that there are two categories of qualified 
transportation fringes for purposes of determining the amount that is 
excludable from gross income. The first category is transportation in a 
commuter highway vehicle and transit passes. The second category is 
qualified parking. There is a statutory monthly limit on the value of 
the benefits from each category that is excludable from gross income. 
For 1999 and 2000, the statutory monthly limit is $65 for 
transportation in a commuter highway vehicle and mass transit passes 
and $175 for qualified parking. An employee may receive benefits from 
each category provided the applicable statutory monthly limit for that 
category is not exceeded. The amount by which the value of qualified 
transportation fringes provided by an employer to an employee exceeds 
the applicable statutory monthly limit is included in the employee's 
wages for income and employment tax purposes.
    The proposed regulations provide that, for purposes of valuing 
qualified parking, the valuation rules under section 1.61-21(b) 
generally apply. With respect to employer-provided van pool benefits, 
the regulations provide that an employer may use the special valuation 
rules provided under section 1.61-21(c), (d), (e), and (f) in valuing 
these benefits. An example in the proposed regulations illustrates that 
in determining the value of a transit pass sold at a discount for 
purposes of section 132(f), the purchase price rather than the face 
amount of the transit pass controls.
    The proposed regulations reflect that qualified transportation 
fringes include cash reimbursement by an employer to an employee for 
expenses incurred by the employee for transportation in a commuter 
highway vehicle and qualified parking. Section 132(f)(3) provides that 
qualified transportation fringes include cash reimbursement for a 
transit pass only if a voucher or similar item that is exchangeable for 
a transit pass is not readily available for direct distribution by the 
employer to the employee. In defining ``readily available,'' the 
regulations reflect the general standards set forth in Notice 94-3, 
under which an amount is readily available if an employer can obtain it 
on terms no less favorable than those available to an individual 
employee and without incurring a significant administrative cost.
    In addition, the proposed regulations clarify the meaning of 
``significant administrative costs.'' The proposed regulations provide 
that the determination of whether obtaining a voucher would result in a 
significant administrative cost is made with respect to each transit 
system voucher. A transit system voucher is a voucher that is accepted 
by one or more mass transit operators (e.g., train, subway, and bus) in 
an area as fare media (or in exchange for fare media). The proposed 
regulations provide a safe harbor under which administrative costs are 
treated as significant if the average monthly administrative costs 
incurred by the employer for a voucher (disregarding delivery charges 
imposed by the fare media provider to the extent not in excess of $15 
per order) are more than 1 percent of the average monthly value of the 
vouchers for a system. These standards are intended to provide clear 
guidance so that employers can determine when qualified transportation 
fringes include cash reimbursement for transit passes.
    The proposed regulations provide that reimbursements may be made 
only pursuant to a bona fide reimbursement arrangement. Thus, an 
employee must provide substantiation that an expense has been incurred 
for qualified transportation fringes in order to receive a 
reimbursement. The regulations recognize that the substantiation 
requirements vary depending upon the payment method used to purchase 
transportation in a commuter highway vehicle, mass transit passes, and 
qualified parking. The regulations provide examples of what constitutes 
reasonable reimbursement procedures in certain circumstances. For 
example,

[[Page 4390]]

if an employee uses metered parking, the substantiation requirement may 
be satisfied if the employee certifies that the expense was incurred 
and the employer has no reason to believe the employee did not actually 
incur the expense.
    The proposed regulations provide that there are no substantiation 
requirements with respect to mass transit passes provided directly by 
an employer to its employees. Of course, an employer may impose its own 
substantiation requirements in addition to those required under the 
regulations.
    The proposed regulations follow the approach taken in Notice 94-3 
with respect to taxing the value of employer-provided parking benefits 
provided to members of car and van pools. The regulations provide that 
the ``prime member'' bears the tax consequences with respect to the 
parking space.\2\ The prime member is the employee to whom the parking 
space is assigned.
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    \2\ Other pool members may choose to reimburse the costs of the 
prime member, in which event, under Rev. Rul. 55-555, 1955-2 C.B. 
20, the reimbursements will not be includible in the prime member's 
gross income. See also Rev. Rul. 80-99, 1980-1 C.B. 10.
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    The proposed regulations reflect that qualified transportation 
fringes may be provided under a compensation reduction arrangement 
which permits an employee to make a compensation reduction election. A 
compensation reduction election is an election in which the employee 
chooses between a fixed amount of compensation to be received at a 
specified future date and a fixed amount of qualified transportation 
fringes to be provided with respect to a specified future period (such 
as a calendar month). The proposed regulations provide that the 
compensation reduction election for any month in a year may not exceed 
the aggregate statutory monthly maximum for that year (e.g., $240 for 
1999 and 2000 ($65 plus $175)). The election must be made before the 
employee is able currently to receive the taxable compensation. Under 
the proposed regulations, the determination of whether the employee is 
able currently to receive the taxable compensation does not depend on 
whether the compensation has been constructively received for purposes 
of section 451.
    The proposed regulations require that an election be irrevocable 
after the beginning of the period for which the qualified 
transportation fringes will be provided. However, unused amounts can be 
carried over to any subsequent months, including months in subsequent 
years, but cannot be used for any purpose other than qualified 
transportation fringes under section 132(f).
    The proposed regulations provide that the exclusion for qualified 
transportation fringes applies only to employees. Partners, 2-percent 
S-corporation shareholders, and independent contractors are not 
considered to be employees for purposes of qualified transportation 
fringes. However, amounts may be excludable pursuant to the working 
condition fringe rules and the de minimis fringe rules that apply to 
partners, 2-percent S-corporation shareholders, and independent 
contractors under section 132(d) and (e).
    The proposed regulations provide that qualified transportation 
fringes not exceeding the applicable statutory monthly limit are not 
subject to employment taxes. However, qualified transportation fringes 
exceeding the applicable statutory monthly limit are includible in the 
employee's wages for income and employment tax purposes. If the value 
of noncash qualified transportation fringes provided to an employee 
exceeds the applicable statutory monthly limit, the employer may follow 
the reporting and withholding guidelines provided in Announcement 85-
113, 1985-31 I.R.B. 31. Announcement 85-113 provides that employers may 
elect, for purposes of the FICA, the FUTA, and federal income tax 
withholding, to treat noncash fringe benefits as paid on a pay period, 
quarterly, semi-annual, annual, or other basis, provided that the 
benefits are treated as paid no less frequently than annually. 
Announcement 85-113 also provides a special accounting rule for noncash 
fringes provided during the last two months of a calendar year.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required.
    An Initial Regulatory Flexibility Analysis has been prepared as 
required for the collection of information in this notice of proposed 
rulemaking under 5 U.S.C. Sec. 603. The analysis follows:

Initial Regulatory Flexibility Analysis

    This proposed rule may have an impact on small organizations that 
provide qualified transportation fringes in the form of cash 
reimbursement or that offer qualified transportation fringes in lieu of 
salary. Section 132(f)(3) provides that qualified transportation 
fringes may be provided in the form of cash reimbursement. The 
legislative history indicates that cash reimbursements must be made 
pursuant to a bona fide reimbursement arrangement. Thus, this proposed 
rule provides that employers must receive substantiation from employees 
as a condition to providing cash reimbursement for qualified 
transportation fringes. Section 132(f)(4) provides that an employee may 
choose between cash compensation and qualified transportation fringes. 
This proposed rule provides that employers must keep records with 
respect to employee compensation reduction elections. Thus, the 
requirements under this proposed rule create a collection of 
information requirement for employers.
    The objectives of this proposed rule with respect to employee 
substantiation of qualified transportation fringes is to carry out the 
legislative intent that cash reimbursement be provided by an employer 
only under a bona fide reimbursement arrangement. The objective of the 
recordkeeping requirement with respect to employee compensation 
reduction elections is to ensure against recharacterization of taxable 
compensation after it has been paid to an employee. The legal basis for 
this proposed rule is section 132(f)(3) and (4).
    All classes of employers will likely offer qualified transportation 
fringes and therefore will be affected by this proposed rule. 
Approximately 265,000 small entities may be affected by this proposed 
rule. There are no professional skills necessary for the recordkeeping 
required under this proposed rule.
    The IRS is not aware of any other relevant federal rules which may 
duplicate, overlap, or conflict with this proposed rule.
    A less burdensome alternative for small organizations would be to 
exempt those entities from the recordkeeping requirements under this 
proposed rule. However, it would be inconsistent with the statutory 
provisions and the legislative history to exempt those entities from 
the recordkeeping requirements imposed under this rule. This proposed 
rule provides several options which avoid more burdensome recordkeeping 
requirements for small entities. This proposed rule provides that (1) 
There are no substantiation requirements if the employer distributes 
transit passes in kind; (2) a compensation reduction election can be 
made electronically; (3) an election to reduce compensation can be 
automatically renewed; and (4) an employer can provide for deemed 
compensation reduction elections under its qualified transportation 
fringe benefit plan.

[[Page 4391]]

    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) and electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department specifically request 
comments on the clarity of the proposed regulations and how they can be 
made easier to understand, and on the administrability of the rules in 
the proposed regulations. All comments will be available for public 
inspection and copying.
    A public hearing has been scheduled for June 1, 2000, beginning at 
10 a.m. in room 2615 of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the 10th Street entrance, located 
between Constitution and Pennsylvania Avenues, NW. In addition, all 
visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 15 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601 (a) (3) apply to the hearing. Persons 
who wish to present oral comments at the hearing must submit written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (signed original and eight (8) copies) by May 
10, 2000. A period of 10 minutes will be allotted to each person for 
making comments. An agenda showing the scheduling of the speakers will 
be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.
    Drafting information: The principal author of these proposed 
regulations is John Richards, Office of the Associate Chief Counsel 
(Employee Benefits and Exempt Organizations). However, other personnel 
from the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority section for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

    Par. 2. Section 1.132-0 is amended by adding entries for 
Sec. 1.132-9 to read as follows:


Sec. 1.132-0  Outline of regulations under section 132.

* * * * *


Sec. 1.132-9(a)  Table of contents.


Sec. 1.132-9(b)  Questions and answers.

* * * * *
    Par. 3 Section 1.132-9 is added to read as follows:


Sec. 1.132-9  Qualified transportation fringes.

    (a) Table of contents. This section contains a list of the 
questions and answers in Sec. 1.132-9.

Q-1. What is a qualified transportation fringe?
Q-2. What is transportation in a commuter highway vehicle?
Q-3. What are transit passes?
Q-4. What is qualified parking?
Q-5. To which workers may qualified transportation fringes be 
provided?
Q-6. Must a qualified transportation fringe benefit plan be in 
writing?
Q-7. Is there a limit on the value of qualified transportation 
fringes that may be excluded from an employee's gross income?
Q-8. What amount is includible in an employee's wages for income and 
employment tax purposes if the value of the qualified transportation 
fringe exceeds the applicable statutory monthly limit?
Q-9. Are excludable qualified transportation fringes calculated on a 
monthly basis?
Q-10. May an employee receive qualified transportation fringes from 
more than one employer?
Q-11. May qualified transportation fringes be provided to employees 
pursuant to a compensation reduction agreement?
Q-12. What is a compensation reduction election for purposes of 
section 132(f)?
Q-13. Is there a limit to the amount of the compensation reduction?
Q-14. When must the employee have made a compensation reduction 
election and under what circumstances can the amount be paid in cash 
to the employee?
Q-15. May an employee whose qualified transportation fringe costs 
are less than the employee's compensation reduction carry over this 
excess amount to subsequent periods?
Q-16. How does section 132(f) apply to expense reimbursements?
Q-17. May an employer provide nontaxable cash reimbursement under 
section 132(f) for periods longer than one month?
Q-18. What are the substantiation requirements if an employer 
distributes transit passes?
Q-19. May an employer choose to impose substantiation requirements 
in addition to those described in this regulation?
Q-20. How is the value of parking determined?
Q-21. How do the qualified transportation fringe rules apply to van 
pools?
Q-22. What are the reporting and employment tax requirements for 
qualified transportation fringes?
Q-23. How does section 132(f) interact with other fringe benefit 
rules?
Q-24. May qualified transportation fringes be provided to 
individuals who are partners, 2-percent shareholders of S-
corporations, or independent contractors?

    (b) Questions and answers.
    Q-1. What is a qualified transportation fringe?
    A-1. (a) The following benefits are ``qualified transportation 
fringe'' benefits:
    (1) Transportation in a commuter highway vehicle.
    (2) Transit passes.
    (3) Qualified parking.
    (b) An employer may simultaneously provide an employee with any one 
or more of these three benefits.
    Q-2. What is transportation in a commuter highway vehicle?
    A-2. Transportation in a commuter highway vehicle is transportation 
provided by an employer to an employee in connection with travel 
between the employee's residence and place of employment. A ``commuter 
highway vehicle'' is a highway vehicle with a seating capacity of at 
least 6 adults (excluding the driver) and with respect to which at 
least 80 percent of the vehicle's mileage is reasonably expected to 
be--
    (a) For transporting employees in connection with travel between 
their residences and their place of employment; and
    (b) On trips during which the number of employees transported for 
commuting is at least one-half of the adult seating capacity of the 
vehicle (excluding the driver).
    Q-3. What are transit passes?
    A-3. A ``transit pass'' is any pass, token, farecard, voucher, or 
similar item (including an item exchangeable for fare media) that 
entitles a person to transportation--
    (a) On mass transit facilities (whether or not publicly owned); or

[[Page 4392]]

    (b) Provided by any person in the business of transporting persons 
for compensation or hire in a highway vehicle with a seating capacity 
of at least six adults (excluding the driver).
    Q-4. What is qualified parking?
    A-4. (a) ``Qualified parking'' is parking provided to an employee 
by an employer--
    (1) On or near the employer's business premises; or
    (2) At a location from which the employee commutes to work by 
carpool, commuter highway vehicle, mass transit facilities, 
transportation provided by any person in the business of transporting 
persons for compensation or hire or by any other means.
    (b) However, parking on or near property used by the employee for 
residential purposes is not qualified parking.
    (c) Parking is provided by an employer if--
    (1) The employer pays for the parking;
    (2) The employer reimburses the employee for parking expenses; or
    (3) The parking is on property that the employer owns or leases. 
See Q/A-16 of this section for rules relating to cash reimbursements.
    Q-5. To which workers may qualified transportation fringes be 
provided?
    A-5. Qualified transportation fringes may be provided only by 
employers to employees. The term ``employee'' for purposes of qualified 
transportation fringes is defined in Sec. 1.132-1(b)(2)(i). This term 
includes only common law employees and other statutory employees, such 
as officers of corporations. See Q/A-24 of this section for rules 
regarding partners, 2-percent shareholders, and independent 
contractors.
    Q-6. Must a qualified transportation fringe benefit plan be in 
writing?
    A-6. No. Section 132(f) does not require that a qualified 
transportation fringe benefit plan be in writing.
    Q-7. Is there a limit on the value of qualified transportation 
fringes that may be excluded from an employee's gross income?
    A-7. (a) Transportation in a commuter highway vehicle and transit 
passes. Before January 1, 2002, up to $65 is excludable from the gross 
income of an employee for transportation in a commuter highway vehicle 
and transit passes provided by an employer for a month. On January 1, 
2002, this amount is increased to $100 per month.
    (b) Parking. Up to $175 is excludable from the gross income of an 
employee for qualified parking in a month.
    (c) Combination. An employer may provide qualified parking benefits 
in addition to transportation in a commuter highway vehicle and transit 
passes.
    (d) Cost-of-living adjustments. The amounts in paragraphs (a) and 
(b) of this Q/A 7 are adjusted annually, beginning with 2000, to 
reflect cost-of-living. The adjusted figures are announced by the 
Service before the beginning of the year.
    Q-8. What amount is includible in an employee's wages for income 
and employment tax purposes if the value of the qualified 
transportation fringe exceeds the applicable statutory monthly limit?
    A-8. Generally, an employee must include in gross income the amount 
by which the fair market value of the benefit exceeds the sum of the 
amount, if any, paid by the employee and any amount excluded from gross 
income under section 132(a)(5). Thus, assuming no other statutory 
exclusion applies, if an employer provides an employee with a qualified 
transportation fringe that exceeds the applicable statutory monthly 
limit and the employee does not make any payment, the value of the 
benefits provided in excess of the applicable statutory monthly limit 
is included in the employee's wages for income and employment tax 
purposes. See Sec. 1.61-21(b)(1). The following examples illustrate the 
principles of this Q/A-8:

    Example 1. (i) For each month in 2000, Employer M provides a 
transit pass valued at $75 to Employee D, who does not pay any 
amount to Employer M for the transit pass.
    (ii) In this example, because the value of the monthly transit 
pass exceeds the statutory monthly limit by $10, $120 ($75--$65, 
times 12 months) must be included in D's wages for income and 
employment tax purposes for 2000 with respect to the transit passes.
    Example 2. (i) For each month in 2000, Employer M provides 
qualified parking valued at $195 to Employee E, who does not pay any 
amount to M for the parking.
    (ii) In this example, because the fair market value of the 
qualified parking exceeds the statutory monthly limit by $20, $240 
($195--$175, times 12 months) must be included in Employee E's wages 
for income and employment tax purposes for 2000 with respect to the 
qualified parking.
    Example 3. (i) For each month in 2000, Employer P provides 
qualified parking with a fair market value of $220 per month to its 
employees, but charges each employee $45 per month.
    (ii) In this example, because the sum of the amount paid by an 
employee ($45) plus the amount excludable for qualified parking 
($175) is not less than the fair market value of the monthly 
benefit, no amount is includible in the employee's wages for income 
and employment tax purposes with respect to the qualified parking.

    Q-9. Are excludable qualified transportation fringes calculated on 
a monthly basis?
    A-9. Yes. The value of transportation in a commuter highway 
vehicle, transit passes, and qualified parking is calculated on a 
monthly basis to determine whether the value of the benefit has 
exceeded the applicable statutory monthly limit on qualified 
transportation fringes. Except in the case of a transit pass, the 
applicable statutory monthly limit applies to qualified transportation 
fringes used by the employee in a month. In the case of a transit pass, 
the applicable statutory monthly limit applies to the transit passes 
provided by the employer to the employee in a month for that month or 
for any previous month in the calendar year. Monthly exclusion amounts 
are not combined to provide a qualified transportation fringe in any 
month exceeding the statutory limit. A ``month'' is a calendar month or 
a substantially equivalent period applied consistently. The following 
examples illustrate the principles of this Q/A-9:

    Example 1. (i) Employee E incurs $150 for qualified parking used 
during the month of June, 2000, for which E is reimbursed $150 by 
Employer R. E incurs $180 in expenses for qualified parking used 
during the month of July, 2000, for which E is reimbursed $180 by R.
    (ii) In this example, because monthly exclusion amounts may not 
be combined to provide a benefit in any month greater than the 
applicable statutory limit, the amount by which the amount 
reimbursed for July exceeds the applicable statutory monthly limit 
($180 minus $175 equals $5) is includible in E's wages for income 
and employment tax purposes.
    Example 2. (i). Employee F receives transit passes from Employer 
G with a value of $195 in the month of March (when the applicable 
statutory monthly limit is $65). F was hired during January and has 
not received any transit passes from G.
    (ii). In this example, the value of the transit passes (three 
months times $65 equals $195) is excludable from F's wages for 
income and employment tax purposes. However, if F was not hired 
until March, only $65 would be excludable from F's wages for income 
and employment tax purposes.
    Example 3. (i). Each month during 2000, Employer R distributes 
transit passes with a face amount of $70 to each of its employees. 
Transit passes with a face amount of $70 can be purchased from the 
transit system by any individual for $65.
    (ii). In this example, because the value of the transit passes 
distributed by R does not exceed the applicable statutory monthly 
limit ($65), no portion of the transit passes is included as wages 
for income and employment tax purposes.
    Q-10. May an employee receive qualified transportation fringes from 
more than one employer?
    A-10. Yes. The statutory monthly limits described in Q/A-7 of this 
section apply to benefits provided by an

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employer to its employees. For this purpose, all employees treated as 
employed by a single employer under section 414(b), (c), (m), or (o) 
are treated as employed by a single employer. See Sec. 1.132-1(c). 
Thus, qualified transportation fringes paid by entities under common 
control under section 414(b), (c), (m), or (o) are combined for 
purposes of applying the applicable statutory limit. In addition, an 
individual who is treated as an employee of the employer under section 
414(n) is treated as an employee of the employer for purposes of 
section 132. See Sec. 414(t). The following examples illustrate the 
principles of this Q/A-10:

    Example 1. (i) During 2000, Employee E works for Employers M and 
N, who are unrelated and not treated as a single employer under 
section 414(b), (c), (m), or (o). Each month, M and N each provide 
qualified parking benefits to E with a value of $100.
    (ii) In this example, because M and N are unrelated employers, 
and the value of the monthly parking benefit provided by each is not 
more than the applicable statutory monthly limit, the parking 
benefits provided by each employer are excludable as qualified 
transportation fringes assuming that the other requirements of this 
section are satisfied.
    Example 2. (i) Same facts as in Example 1, except that M and N 
are treated as a single employer under section 414(b).
    (ii) In this example, because M and N are treated as a single 
employer, the value of the monthly parking benefit provided by M and 
N must be combined for purposes of determining whether the 
applicable statutory monthly limit has been exceeded. Thus, the 
amount by which the value of the parking benefit exceeds the monthly 
limit ($200 minus $175 equals $25) for each month in 2000 is 
includible in E's wages for income and employment tax purposes.

    Q-11. May qualified transportation fringes be provided pursuant to 
a compensation reduction agreement?
    A-11. Yes. An employer may offer employees a choice between cash 
compensation and any qualified transportation fringe. An employee who 
is offered this choice and who elects qualified transportation fringes 
is not required to include the cash compensation in income if--
    (a) The election is pursuant to an arrangement described in Q/A-12 
of this section;
    (b) The amount of the reduction in cash compensation does not 
exceed the limitation in Q/A-13 of this section;
    (c) The arrangement satisfies the timing and reimbursement rules in 
Q/A-14 and 16 of this section; and
    (d) The related fringe benefit arrangement otherwise satisfies the 
requirements set forth elsewhere in this section.
    Q-12. What is a compensation reduction election for purposes of 
section 132(f)?
    A-12. (a) Election requirements generally. A compensation reduction 
arrangement is an arrangement under which the employer provides the 
employee with the right to elect whether the employee will receive 
either a fixed amount of cash compensation at a specified future date 
or a fixed amount of qualified transportation fringes to be provided 
for a specified future period (such as qualified parking to be used 
during a future calendar month). The employee's election must be in 
writing or another form, such as electronic, that includes, in a 
permanent and verifiable form, the information required to be in the 
election. The election must contain the date of the election, the 
amount of the compensation to be reduced, and the period for which the 
benefit will be provided. The election must relate to a fixed dollar 
amount or fixed percentage of compensation reduction. An election to 
reduce compensation for a period by a set amount for such period may be 
automatically renewed for subsequent periods.
    (b) Negative election permitted. An employer may provide under its 
qualified transportation fringe benefit plan that a compensation 
reduction election will be deemed to have been made if the employee 
does not elect to receive cash compensation in lieu of the qualified 
transportation fringe provided that the employee receives adequate 
notice that a compensation reduction will be made and is given adequate 
opportunity to choose to receive the cash compensation instead of the 
qualified transportation fringe.
    Q-13. Is there a limit to the amount of the compensation reduction?
    A-13. Yes. Each month, the amount of the compensation reduction may 
not exceed the combined applicable statutory monthly limits for 
transportation in a commuter highway vehicle, transit passes, and 
qualified parking. For example, for 2000, an employee could elect to 
reduce compensation for any month by no more than $240 ($65 for 
transportation in a commuter highway vehicle and transit passes, plus 
$175 for qualified parking) with respect to qualified transportation 
fringes. If an employee were to elect to reduce compensation by $250 
for a month, the excess $10 ($250 minus $240) would be includible in 
the employee's wages for income and employment tax purposes.
    Q-14. When must the employee have made a compensation reduction 
election and under what circumstances can the amount be paid in cash to 
the employee?
    A-14. The compensation reduction election must satisfy the 
following requirements.
    (a) Timing of election. The compensation reduction election must be 
made before the employee is able currently to receive the cash or other 
taxable amount at the employee's discretion. The determination of 
whether the employee is able currently to receive the cash does not 
depend on whether it has been constructively received for purposes of 
section 451. The election must specify that the period (such as a 
calendar month) for which the qualified transportation fringe will be 
provided must not begin before the election is made. For this purpose, 
the date a qualified transportation fringe is provided is--
    (1) The date the employee receives a voucher or similar item; or
    (2) In any other case, the date the employee uses the qualified 
transportation fringe.
    (b) Thus, a compensation reduction election must relate to 
qualified transportation fringes to be provided after the election.
    (c) Revocability of elections. The employee may not revoke a 
compensation reduction election after the employee is able currently to 
receive the cash or other taxable amount at the employee's discretion. 
In addition, the election may not be revoked after the beginning of the 
period for which the qualified transportation fringe will be provided.
    (d) Compensation reduction amounts not refundable. Unless an 
election is revoked in a manner consistent with paragraph (a)(3) of 
this Q/A-14, an employee may not subsequently receive the compensation 
(in cash or any form other than by payment of a qualified 
transportation fringe under the employer's plan). Thus, an employer's 
qualified transportation fringe benefit plan may not provide that an 
employee who ceases to participate in the employer's qualified 
transportation fringe benefit plan is entitled to receive a refund of 
the amounts by which the employee's compensation reduction exceeds the 
actual qualified transportation fringes provided to the employee by the 
employer.
    (e) Examples. The following examples illustrate the principles of 
this Q/A-14:

    Example 1. (i) Employer P maintains a qualified transportation 
fringe benefit arrangement. Employees of P are paid twice per month, 
with the payroll dates being the first and the fifteenth day of the 
month. Under P's arrangement, an employee is permitted to elect at 
any time before the first

[[Page 4394]]

day of a month to reduce his or her compensation payable during that 
month in an amount up to the applicable statutory monthly limit 
(i.e., for 2000, $65 if the employee elects coverage for 
transportation in a commuter highway vehicle or a mass transit pass, 
or $175 if the employee chooses qualified parking) in return for the 
right to receive qualified transportation fringes up to the amount 
of the election. If such an election is made, P will provide a mass 
transit pass for that month with a value not exceeding the 
compensation reduction amount elected by the employee or will 
reimburse the cost of other qualified transportation fringes used by 
the employee on or after the first day of that month up to the 
compensation reduction amount elected by the employee. Any 
compensation reduction amount elected by the employee for the month 
that is not used for qualified transportation fringes is not 
refunded to the employee at any future date.
    (ii) In this example, the arrangement satisfies the requirements 
of this Q/A-14 because the election is made before the employee is 
able currently to receive the cash and the election specifies the 
future period for which the qualified transportation fringes will be 
provided. The arrangement would also satisfy the requirements of 
this Q/A-14 and Q/A-13 of this section if employees were allowed to 
elect to reduce compensation up to $240 (for 2000) per month.
    (iii) The arrangement would also satisfy the requirements of 
this Q/A-14 (and Q/A-13 of this section) if employees were allowed 
to make an election at any time before the first or the fifteenth 
day of the month to reduce their compensation payable on that 
payroll date by an amount not in excess of one-half of the 
applicable statutory monthly limit (depending on the type of 
qualified transportation fringe elected by the employee) and P 
provides a mass transit pass on or after the applicable payroll date 
for the compensation reduction amount elected by the employee for 
the payroll date or reimburses the cost of other qualified 
transportation fringes used by the employee on or after the payroll 
date up to the compensation reduction amount elected by the employee 
for that payroll date.
    Example 2. (i) Employee Q elects to reduce his compensation 
payable on March 1 of a year (when the statutory monthly limit for 
transportation in a commuter highway vehicle and transit passes is 
$65) by $195 in exchange for a mass transit voucher to be provided 
in March. The election is made on the preceding February 27. 
Employee Q was hired in January of the year. On March 10 of the 
year, the employer of Employee Q delivers to Employee Q a mass 
transit voucher worth $195.
    (ii) In this example, $130 is included in Employee Q's wages for 
income and employment tax purposes because the compensation 
reduction election fails to satisfy the requirement in this Q/A-14 
and Q/A-12 of this section that the election relate to qualified 
transportation fringes to be provided for a future period to the 
extent the election relates to $65 worth of transit passes for each 
of January and February of the year. No amount would be included in 
Employee Q's wages as a result of the election if $195 worth of mass 
transit passes were instead delivered to Employee Q in May of the 
year (because the compensation reduction would relate solely to 
fringes to be provided for a future period and the amount provided 
does not exceed the aggregate limit for the period, i.e., the sum of 
$65 for each of March, April, and May)

    Q-15. May an employee whose qualified transportation fringe costs 
are less than the employee's compensation reduction carry over this 
excess amount to subsequent periods?
    A-15. Yes. An employee may carry over unused compensation reduction 
amounts to subsequent periods under the plan of the employee's 
employer. The following example illustrates the principles of this Q/A-
15:

    Example. (i) By an election made before November 1, 1999, 
Employee E elects to reduce compensation in the amount of $65 for 
the month of November, 1999. E incurs $50 in employee-operated 
commuter highway vehicle expenses during November for which E is 
reimbursed $50 by Employer R. By an election made before December 1, 
1999, E elects to reduce compensation by $65 for the month of 
December. E incurs $65 in employee-operated commuter highway vehicle 
expenses during December for which E is reimbursed $65 by R. Before 
January 1, 2000, E elects to reduce compensation by $50 for the 
month of January. E incurs $65 in employee-operated commuter highway 
vehicle expenses during January for which E is reimbursed $65 by R 
because R allows E to carry over to January, 2000, the $15 amount by 
which the compensation reductions for November and December exceeded 
the employee-operated commuter highway vehicle expenses incurred 
during those months.
    (ii) In this example, because E is reimbursed in an amount not 
exceeding the applicable statutory monthly limit, and the 
reimbursement does not exceed the amount of employee-operated 
commuter highway vehicle expenses incurred during the month of 
January, the amount reimbursed ($65) is excludable from E's wages 
for income and employment tax purposes.

    Q-16. How does section 132(f) apply to expense reimbursements?
    A-16. (a) In general. The term ``qualified transportation fringe'' 
includes cash reimbursement by an employer to an employee for expenses 
incurred or paid by an employee for transportation in a commuter 
highway vehicle or qualified parking. The reimbursement must be made 
under a bona fide reimbursement arrangement which meets the rules of 
paragraph (d) of this Q/A-16. The term ``cash reimbursement'' does not 
include cash advances.
    (b) Special rule for transit passes. The term ``qualified 
transportation fringe'' includes cash reimbursement for transit passes 
made under a bona fide reimbursement arrangement, but, in accordance 
with section 132(f)(3), only if no voucher or similar item that may be 
exchanged only for a transit pass is readily available for direct 
distribution by the employer to employees. For this purpose, a voucher 
or similar item is ``readily available'' if an employer can obtain it--
    (1) On terms no less favorable than those available to an 
individual employee; and
    (2) Without incurring a significant administrative cost.
    (c) Significant administrative cost. Administrative costs relate 
only to fees paid to fare media providers. The determination of whether 
obtaining a voucher would result in a significant administrative cost 
is made with respect to each transit system voucher. A transit system 
voucher is a voucher that is accepted by one or more mass transit 
operators (e.g., train, subway, and bus) in an area as fare media (or 
in exchange for fare media). Administrative costs are treated as 
significant if the average monthly administrative costs incurred by the 
employer for a voucher (disregarding delivery charges imposed by the 
fare media provider to the extent not in excess of $15 per order) are 
more than 1 percent of the average monthly value of the vouchers for a 
system. Thus, whether a voucher is readily available without incurring 
a significant administrative cost is determined with respect to the 
transit system in each area for which the voucher may be used. The 
following example illustrates the principles of this Q/A-16:

    Example. (i) Company C in City X sells mass transit vouchers to 
employers in the metropolitan area of X worth $65 each. Several 
different bus, rail, van pool, and ferry operators service X, and a 
number of the operators accept the vouchers either as fare media or 
in exchange for fare media. Employers can readily obtain vouchers 
for distribution to their employees. To cover its operating 
expenses, C imposes on each voucher a 50 cents charge, plus a $15 
charge for delivery. Employer M disburses vouchers purchased from C 
to its employees who use operators that accept the vouchers.
    (ii) In this example, because the cost of a voucher disbursed to 
M's employees is not more than 1 percent of the value of the voucher 
(50 cents divided by $65 equals 0.77 percent) and the delivery 
charges are disregarded because they are not more than $15, vouchers 
for X are readily available. Thus, the vouchers disbursed to M's 
employees are qualified transportation fringes and any reimbursement 
of mass transportation costs in X would not be a qualified 
transportation fringe.

    (d) Substantiation requirements. Employers that make cash 
reimbursements must establish a bona

[[Page 4395]]

fide reimbursement arrangement to establish that their employees have, 
in fact, incurred expenses for transportation in a commuter highway 
vehicle, transit passes, or qualified parking. For purposes of section 
132(f), what constitutes a bona fide reimbursement arrangement may vary 
depending on the facts and circumstances, including the method or 
methods of payment utilized within the mass transit system. The 
employer must implement reasonable procedures to ensure that an amount 
equal to the reimbursement was incurred for transportation in a 
commuter highway vehicle, transit passes, or qualified parking. The 
following are examples of reasonable reimbursement procedures for 
purposes of this Q/A-16:
    (1) An employee presents to the employer a parking expense receipt 
for parking on or near the employer's business premises and certifies 
that the parking was used by the employee and the employer has no 
reason to doubt the employee's certification.
    (2) An employee submits a used transit pass to the employer at the 
end of the month and certifies both that he or she purchased it, and 
that he or she used it during the month, or presents a transit pass to 
the employer at the beginning of the month and certifies that it will 
be used it during the month. In both cases, the employer has no reason 
to doubt the employee's certification.
    (3) If a receipt is not provided in the ordinary course of business 
(e.g., if the employee uses metered parking or if used transit passes 
cannot be returned to the user), the employee certifies to the employer 
the type and the amount of expenses incurred and the employer has no 
reason to doubt the employee's certification.
    Q-17. May an employer provide nontaxable cash reimbursement under 
section 132(f) for periods longer than one month?
    A-17. Yes. Qualified transportation fringes include reimbursement 
to employees for costs incurred for transportation in more than one 
month, provided the reimbursement for each month is calculated 
separately and does not exceed the applicable statutory monthly limit 
for any month. See Q/A-8 and 9 of this section if the limit for a month 
is exceeded. The following example illustrates the principles of this 
Q/A-17:

    Example. (i) Employee R pays $100 per month for qualified 
parking used during the period from April 1, 2000 through June 30, 
2000. After receiving adequate substantiation from R, R's employer 
reimburses R $300 in cash on June 30, 2000.
    (ii) In this example, because the value of the reimbursed 
expenses for each month did not exceed the applicable statutory 
monthly limit, the $300 reimbursement is excludable from R's wages 
for income and employment tax purposes as a qualified transportation 
fringe.

    Q-18. What are the substantiation requirements if an employer 
distributes transit passes?
    A-18. There are no substantiation requirements if the employer 
distributes transit passes. Thus, an employer may distribute a transit 
pass for each month with a value not more than the statutory monthly 
limit without requiring any certification from the employee regarding 
the use of the transit pass.
    Q-19. May an employer choose to impose substantiation requirements 
in addition to those described in this regulation?
    A--19. Yes.
    Q-20. How is the value of parking determined?
    A-20. Section 1.61-21(b)(2) applies for purposes of determining the 
value of parking.
    Q-21. How do the qualified transportation fringe rules apply to van 
pools?
    A-21. (a) Van pools generally. Employer-and employee-operated van 
pools, as well as private or public transit-operated van pools, may 
qualify as qualified transportation fringes. The value of van pool 
benefits which are qualified transportation fringes may be excluded up 
to the applicable statutory monthly limit for transportation in a 
commuter highway vehicle and transit passes, less the value of any 
transit passes provided by the employer for the month.
    (b) Employer-operated van pools. The value of van pool 
transportation provided by or for an employer to its employees is 
excludable as a qualified transportation fringe, provided the van 
qualifies as a ``commuter highway vehicle'' as defined in section 
132(f)(5)(B) and Q/A 2- of this section. A van pool is operated by or 
for the employer if the employer purchases or leases vans to enable 
employees to commute together or the employer contracts with and pays a 
third party to provide the vans and some or all of the costs of 
operating the vans, including maintenance, liability insurance and 
other operating expenses.
    (c) Employee-operated van pools. Cash reimbursement by an employer 
to employees for expenses incurred for transportation in a van pool 
operated by employees independent of their employer are excludable as 
qualified transportation fringes provided that the van qualifies as a 
``commuter highway vehicle'' as defined in section 132(f)(5)(B) and Q/
A-2 of this section. See Q/A-16 of this section for the rules governing 
cash reimbursements.
    (d) Private or public transit-operated van pool transit passes. The 
qualified transportation fringe exclusion for transit passes is 
available for travel in van pools owned and operated either by public 
transit authorities or by any person in the business of transporting 
persons for compensation or hire. In accordance with paragraph (b) of 
Q/A-3 of this section, the van must seat at least six adults (excluding 
the driver). See Q/A-16(b) and (c) of this section for a special rule 
for cash reimbursement for transit passes.
    (e) Value of van pool transportation benefits. Section 1.61-
21(b)(2) provides that the fair market value of a fringe benefit is 
based on all the facts and circumstances. Alternatively, transportation 
in an employer-provided commuter highway vehicle may be valued under 
the automobile lease valuation rule in Sec. 1.61-21(d), the vehicle 
cents-per-mile rule in Sec. 1.61-21(e), or the commuting valuation rule 
in Sec. 1.61-21(f). If one of these special valuation rules is used, 
the employer must use the same valuation rule to value the use of the 
commuter highway vehicle by each employee who share the use. See 
Sec. 1.61-21(c).
    (f) Qualified parking prime member. If an employee obtains a 
qualified parking space as a result of membership in a car or van pool, 
the applicable statutory monthly limit for qualified parking applies to 
the individual to whom the parking space is assigned. This individual 
is the ``prime member.'' In determining the tax consequences to the 
prime member, the statutory monthly limit amounts of each car pool 
member may not be combined. If the employer provides access to the 
space and the space is not assigned to a particular individual, then 
the employer must designate one of its employees as the prime member 
who will bear the tax consequences. The employer may not designate more 
than one prime member for a car or van pool during a month. The 
employer of the prime member is responsible for including the value of 
the qualified parking in excess of the statutory monthly limit in the 
prime member's wages for income and employment tax purposes.
    Q-22. What are the reporting and employment tax requirements for 
qualified transportation fringes?
    A-22. (a) Employment tax treatment generally. Qualified 
transportation fringes not exceeding the applicable statutory monthly 
limit described in Q/A-7 of this section are not wages for

[[Page 4396]]

purposes of the Federal Insurance Contributions Act (FICA), the Federal 
Unemployment Tax Act (FUTA), and federal income tax withholding. Any 
amount by which an employee elects to reduce compensation as provided 
in Q/A-11 of this section is not subject to the FICA, the FUTA, and 
federal income tax withholding. Qualified transportation fringes 
exceeding the applicable statutory monthly limit described in Q/A-7 of 
this section are wages for purposes of the FICA, the FUTA, and federal 
income tax withholding and are reported on the employee's Form W-2, 
Wage and Tax Statement.
    (b) Employment tax treatment of cash reimbursement exceeding 
monthly limits. Cash reimbursement to employees (for example, cash 
reimbursement for qualified parking) in excess of the applicable 
statutory monthly limit under section 132(f) are treated as paid for 
employment tax purposes when actually or constructively paid. See 
Secs. 31.3121(a)-2(a), 31.3301-4, 31.3402(a)-1(b) of this chapter. 
Employers must report and deposit the amounts withheld in addition to 
reporting and depositing other employment taxes. See Q/A-16 of this 
section for rules governing cash reimbursements.
    (c) Noncash fringe benefits exceeding monthly limits. If the value 
of noncash qualified transportation fringes exceeds the applicable 
statutory monthly limit, the employer may elect, for purposes of the 
FICA, the FUTA, and federal income tax withholding, to treat the 
noncash taxable fringe benefits as paid on a pay period, quarterly, 
semi-annual, annual, or other basis, provided that the benefits are 
treated as paid no less frequently than annually.
    Q-23. How does section 132(f) interact with other fringe benefit 
rules?
    A-23. For purposes of section 132, the terms ``working condition 
fringe'' and ``de minimis fringe'' do not include any qualified 
transportation fringe under section 132(f). If, however, an employer 
provides local transportation other than transit passes, the value of 
the benefit may be excludable, either totally or partially, under 
fringe benefit rules other than the qualified transportation fringe 
rules under section 132(f). See Secs. 1.132-6(d)(2)(i) (occasional 
local transportation fare), 1.132-6(d)(2)(iii) (transportation provided 
under unusual circumstances), and 1.61-21(k) (valuation of local 
transportation provided to qualified employees).
    Q-24. May qualified transportation fringes be provided to 
individuals who are partners, 2-percent shareholders of S-corporations, 
or independent contractors?
    A-24. (a) General rule. Section 132(f)(5)(E) states that self-
employed individuals who are employees within the meaning of section 
401(c)(1) are not employees for purposes of section 132(f). Therefore, 
individuals who are partners, sole proprietors, or other independent 
contractors are not employees for purposes of section 132(f). In 
addition, under section 1372(a), 2-percent shareholders of S 
corporations are treated as partners for fringe benefit purposes. Thus, 
an individual who is both a 2-percent shareholder of an S corporation 
and a common law employee of that S corporation is not considered an 
employee for purposes of section 132(f). However, while section 132(f) 
does not apply to individuals who are partners, 2-percent shareholders 
of S corporations, or independent contractors, other exclusions for 
working condition and de minimis fringes may be available as described 
in paragraphs (b) and (c) of this Q/A-24. See Secs. 1.132-1(b)(2) and 
1.132-1(b)(4).
    (b) Transit passes. The working condition and de minimis fringe 
exclusions under section 132(a)(3) and (4) are available for transit 
passes provided to individuals who are partners, 2-percent 
shareholders, and independent contractors. For example, tokens or 
farecards provided by a partnership to an individual who is a partner 
that enable the partner to commute on a public transit system (not 
including privately-operated van pools) are excludable from the 
partner's gross income if the value of the tokens and farecards in any 
month does not exceed the dollar amount specified in Sec. 1.132-
6(d)(1). However, if the value of a pass provided in a month exceeds 
the dollar amount specified in Sec. 1.132-6(d)(1), the full value of 
the benefit provided (not merely the amount in excess of the dollar 
amount specified in Sec. 1.132-6(d)(1)) is includible in gross income.
    (c) Parking. The working condition fringe rules under section 
132(d) do not apply to commuter parking. See Sec. 1.132-5(a)(1). 
However, the de minimis fringe rules under section 132(e) are available 
for parking provided to individuals who are partners, 2-percent 
shareholders, or independent contractors that qualifies under the de 
minimis rules. See Sec. 1.132-6(a) and (b). The following example 
illustrates the principles of this Q/A-24:

    Example. (i) Individual G is a partner in partnership P. 
Individual G commutes to and from G's office every day and parks 
free of charge in P's lot.
    (ii) In this example, the value of the parking is not excluded 
under section 132(f), but may be excluded under section 132(e) if 
the parking is a de minimis fringe under Sec. 1.132-6.

Robert E. Wenzel,
Commissioner of Internal Revenue.
[FR Doc. 00-1859 Filed 1-24-00; 1:36 pm]
BILLING CODE 4830-01-U