Td 8933

Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
CFR part or section where
identified and described
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1.460–1 .................................
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Current OMB
control No.
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1545–1650

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Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 20, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01–6 Filed 1–10–01; 8:45 am]
BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY
Internal Revenue Service (IRS)
26 CFR Parts 1 and 602
[TD 8933]
RIN 1545–AX33

Qualified Transportation Fringe
Benefits
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulation.

This document contains final
regulations relating to qualified
transportation fringe benefits. These
final regulations provide rules to ensure
that transportation benefits provided to
employees are excludable from gross
income. These final 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
final regulations affect employers that
offer qualified transportation fringes and
employees who receive these benefits.
DATES: Effective Date: These regulations
are effective January 11, 2001.
Applicability Date: For dates of
applicability, see § 1.132–9(b), Q/A–25.
FOR FURTHER INFORMATION CONTACT: John
Richards, (202) 622–6040 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
SUMMARY:

Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545–1676.
Responses to this collection of
information are mandatory to obtain the
benefit described under section 132(f).

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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.
The estimated average annual
recordkeeping burden per recordkeeper
is 26.5 hours. The estimated annual
reporting burden per respondent is .8
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC
20224, and 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.
Books or records relating to a
collection of information must be
retained as long as their contents might
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.
Background
This document contains amendments
to 26 CFR part 1 (Income Tax
Regulations). On January 27, 2000, a
proposed regulation (REG–113572–99)
relating to qualified transportation
fringes was published in the Federal
Register (65 FR 4388). A public hearing
was held on June 1, 2000. Written or
electronic comments responding to the
notice of proposed rulemaking were
received. After consideration of all the
comments, the proposed regulations are
adopted as amended by this Treasury
decision. The revisions are discussed
below.
Explanation of Provisions and
Summary of Comments
In general, comments received on the
proposed regulations were favorable
and, accordingly, the final regulations
retain the general structure of the
proposed regulations, including the
question and answer format and a
variety of examples illustrating the
substance of the final regulations.
However, commentators made a number
of specific recommendations for
modifications and clarifications of the
regulations. In response to these
comments, the final regulations
incorporate the modifications and
clarifications described below.

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A. Whether Vouchers are Readily
Available
Section 132(f)(3) provides that
qualified transportation fringes include
cash reimbursement for transit passes
‘‘only if a voucher or similar item which
may be exchanged only for a transit pass
is not readily available for direct
distribution by the employer to the
employee.’’ Thus, if vouchers are
readily available, the employer must use
vouchers and cash reimbursement of a
mass transit expense would not be a
qualified transportation fringe.
Most of the comments received
addressed the issue of whether vouchers
are ‘‘readily available.’’ Commentators
representing employers generally
favored rules permitting cash
reimbursement. Commentators
representing transit operators and
voucher providers generally favored
rules not permitting cash
reimbursement. The following discusses
three issues raised by commentators:
first, whether the proposed regulations’
1 percent safe harbor should be
retained; second, whether internal
administrative costs should be
considered in applying the 1 percent
test; and third, whether other
nonfinancial restrictions should be
considered in determining whether
vouchers are readily available.
1. The 1 Percent Safe Harbor
Under Notice 94–3, 1994–1 C.B. 327,
and the proposed regulations, a voucher
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. Under
the proposed regulations, administrative
costs relate only to fees paid to fare
media providers, and the determination
of whether obtaining a voucher would
result in a significant administrative
cost is made with respect to each transit
system voucher. The proposed
regulations provide a rule 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.
Commentators, in particular those
representing fare media providers and
transit operators, suggested that the fare
media provider fee percentage causing
vouchers to not be readily available
should be raised because many fare
media providers charge fees in excess of
the 1 percent limit and, thus, under this

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test, transit vouchers would not be
considered readily available in some
large metropolitan areas. These
commentators assert that the 1 percent
test is therefore contrary to the intent of
the statute. Commentators suggested
that the 1 percent test, particularly if
combined with inadequate cash
reimbursement substantiation
requirements, may result in taxpayer
abuse, with the result that the benefit
might not be used for the purpose for
which it is intended, which is to
increase the use of mass transit. In
addition, commentators testified at the
public hearing that the mandatory use of
vouchers (with no ability to use cash
reimbursement if vouchers are readily
available) would increase the use of
vouchers and promote the development
of advanced technologies that minimize
the burden on employers while ensuring
that the benefit is used for mass transit.
These new technologies might allow an
employer to make payment directly to
the transit operator, who in turn credits
fare to the employee’s magnetic media
fare card, thus eliminating the need for
employers to incur the expense of
distributing vouchers.
Other commentators, in particular
groups representing employers,
generally favored the 1 percent test, but
suggested that internal costs be
considered in applying the test
(discussed below). These commentators
took the position that an increase in the
percentage might affect the market
charge for such services. There was also
a concern that a strict voucher-use
requirement would result in fewer
employers adopting transit pass
programs, thus frustrating the purpose
of section 132(f) to increase the use of
mass transit.
The final regulations retain the 1
percent test. The 1 percent test,
applicable for years beginning after
December 31, 2003, is appropriate in
light of the rule (discussed below) that
only voucher provider fees are
considered in determining availability.
It is intended that the delayed
application of this rule would provide
sufficient time for those affected by this
rule to modify their systems and
procedures appropriately. The 1 percent
threshold, coupled with the exclusion of
internal administrative costs from the
readily available determination,
represents a balanced approach that will
promote the growth of voucher
programs in most transportation areas.
In addition, raising the percentage
threshold could curtail the growth in
transit benefit programs, which would
be contrary to the goal of increasing the
use of mass transit. Finally, in cases
where cash reimbursement is allowed,

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adequate substantiation requirements
will ensure that transit pass benefits
will actually go toward mass
transportation usage. In this regard, the
proposed regulations provide that
employers must implement reasonable
procedures to ensure that an amount
equal to the reimbursement was
incurred for transit passes. For example,
the final regulations clarify that in
circumstances when employee
certification is a reasonable
reimbursement procedure, it must occur
after the expense is incurred.
The final regulations also clarify the
application of the 1 percent rule if
multiple vouchers for a transit system
are available for distribution by an
employer to employees, and if multiple
transit system vouchers are required in
an area to meet the transit needs of an
employer’s employees. The final
regulations provide that if multiple
transit system vouchers are available for
direct distribution to employees, the
employer must consider the lowest cost
voucher for purposes of determining
whether the voucher provider fees cause
vouchers to not be readily available.
However, if multiple vouchers are
required in an area to meet the transit
needs of the individual employees in
that area, the employer has the option
of averaging the costs applied to
vouchers from each system for purposes
of determining whether the voucher
provider fees cause vouchers to not be
readily available.
2. Internal Administrative Costs
Several commentators representing
employers recommended that, in
addition to fare media provider fees,
internal administrative costs, especially
security and distribution costs, should
be considered in determining whether
vouchers are readily available. These
commentators noted that administrative
costs are increased when an employer
must maintain both a voucher system
and a reimbursement system to provide
qualified transportation fringes. For
example, the employer may maintain a
cash reimbursement system for
transportation in a commuter highway
vehicle and qualified parking, and also
maintain a voucher system for transit
passes. In addition, several
commentators suggested that the
increased costs and administrative
burden for employers that maintain
offices in multiple cities should also be
considered in determining whether
vouchers are readily available.
The final regulations retain the test
considering only fees paid to voucher
providers in determining availability
based on a plain reading of the terms of
the statute. The language ‘‘readily

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available for direct distribution by the
employer to the employee’’ under
section 132(f)(3) in its plain, ordinary
sense means that vouchers are easily
obtainable for direct distribution to the
employer’s employees. The
determination of availability bears no
relationship with costs that may be
incurred after vouchers have been
obtained. The service fees charged by
voucher providers and delivery costs
can reasonably be viewed as affecting
whether vouchers are easily obtainable;
an employer’s internal costs of
subsequently administering a voucher
program would not. Thus, based upon
the plain language of section 132(f),
internal administrative costs do not
affect whether vouchers are readily
available.
Moreover, the test considering only
voucher provider fees is a comparatively
simple bright line test. A test that
depends on the employer’s internal
administrative costs would necessarily
be complex, requiring complex rules
that would be difficult for employers to
apply.
3. Other Nonfinancial Restrictions
Commentators representing
employers suggested that nonfinancial
factors should be considered in
determining whether vouchers are
readily available. They suggested that
factors such as whether there are
reasonable advance purchase and
minimum purchase requirements, and
whether vouchers can be purchased in
appropriate denominations, should be
considered in determining availability.
The final regulations adopt this
suggestion because nonfinancial
restrictions would reasonably affect
whether vouchers are available for
distribution by an employer to an
employee.
The final regulations provide
guidance on the types of nonfinancial
restrictions that cause vouchers to not
be readily available. The final
regulations provide that certain
nonfinancial restrictions, such as a
voucher provider not making vouchers
available for purchase at reasonable
intervals or failing to provide the
vouchers within a reasonable period
after receiving payment for the voucher,
cause vouchers to not be readily
available. In addition, if a voucher
provider does not provide vouchers in
reasonably appropriate quantities, or in
reasonably appropriate denominations,
vouchers may not be readily available.
When and as the standards in these
final regulations go into effect, they will
supercede the current law standards in
Notice 94–3.

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B. Advance Transit Passes
Commentators suggested that the
administrability of transit pass programs
would be improved if vouchers were
permitted to be distributed in advance
for more than one month. The final
regulations adopt this suggestion.
In October of this year, the IRS issued
Announcement 2000–78 (2000–43 I.R.B.
428) to notify taxpayers that, when
finalized, the regulations will clarify
that transit passes may be distributed in
advance for more than one month (such
as for a calendar quarter) by taking into
account the monthly limits for all
months for which the transit passes are
distributed. The announcement further
provides, however, that if an employee
receives advance transit passes, and the
employee’s employment terminates
before the beginning of the last month
of the period for which the transit
passes were provided, the employer
must include in the employee’s wages,
for income and for employment tax
purposes (FICA, FUTA, and income tax
withholding), the value of the passes
provided for those month(s) beginning
after the employee’s employment
terminates to the extent the employer
does not recover those transit passes or
the value of those passes. The
announcement provides that pending
the issuance of these final regulations,
employers may rely on the
announcement.
The final regulations differ from the
announcement in one respect. In any
case in which transit passes are
provided in advance for a period of no
more than three months (such as for a
calendar quarter), but the recipient
ceases to be an employee before the
beginning of the last month in that
period, the final regulations provide that
the value of a transit pass provided in
advance for a month is excluded from
wages for employment tax (FICA,
FUTA, and income tax withholding)
purposes (but not for income tax
purposes) unless at the time the transit
passes were distributed there was an
established termination date that was
before the beginning of the last month
of that period and the employee does in
fact terminate employment before the
beginning of the last month of that
period.
C. Qualified Parking
The final regulations address whether
reimbursement paid to an employee for
parking at a work location away from
the employee’s permanent work
location is excludable from wages for
income and employment tax purposes
under section 132(f). Section
132(f)(5)(C) defines qualified parking, in

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part, as ‘‘parking provided to an
employee on or near the business
premises of the employer * * * .’’ The
final regulations provide that qualified
parking includes parking on or near a
work location at which the employee
performs services for the employer.
However, qualified parking does not
include reimbursement for parking that
is otherwise excludable from gross
income as a reimbursement treated as
paid under an accountable plan under
§ 1.62–2 of the Income Tax Regulations,
or parking provided in kind to an
employee that is excludable from the
employee’s gross income as a working
condition fringe under section 132(a)(3).
Thus, if the exclusion at § 1.62–2 or
section 132(a)(3) is available (even if not
reimbursed by the employer), then
section 132(f) does not apply.
Whether a reimbursement for local
transportation expenses, including
parking at a work location away from
the employee’s permanent work
location, is excludable from the
employee’s gross income under § 1.62–
2, or whether parking provided in kind
to an employee is excludable from the
employee’s gross income under section
132(a)(3), is determined based upon
whether the parking expenses would be
deductible if paid or incurred by the
employee under section 162(a) as an
expense incurred in the employee’s
trade or business of being an employee
for the employer. §§ 1.62–2(d); 1.132–
5(a)(2). Revenue Ruling 99–7 (1999–1
C.B. 361) addresses under what
circumstances daily transportation
expenses, including parking, incurred
by a taxpayer in going between the
taxpayer’s residence and a work
location are deductible by the taxpayer
under section 162(a).
The final regulations provide the
minimum requirements to ensure that
transportation benefits are qualified
transportation fringes under section
132(f). An employer may have a transit
benefit program that is more restrictive
than a program meeting the minimum
requirements under the regulations. In
addition, these regulations do not affect
the application of authorities outside
the Internal Revenue Code which may
restrict a transportation benefit program.
Federal Government agencies, for
example, may be required by other
federal law to implement restrictions
beyond those required under these
regulations.
D. Applicability Date
The regulations are generally
applicable for taxable years beginning
after December 31, 2001. However, in
order to provide a transition period for
those affected by the 1 percent rule

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2243

(described under ‘‘The 1 percent safe
harbor’’ in this preamble), that rule is
applicable for taxable years beginning
after December 31, 2003.
Effect on Other Documents
The following document is obsolete as
of January 11, 2001: Announcement
2000–78 (2000–43 I.R.B. 428).
The following document is modified
as of the date these regulations become
applicable (see Q/A–25): Notice 94–3
(1994–1 C.B. 327).
Special Analyses
It has been determined that this
Treasury Decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. A final regulatory
flexibility analysis has been prepared
for the collection of information in this
Treasury decision under 5 U.S.C. 604. A
summary of the analysis is set forth in
this preamble under the heading
‘‘Summary of Final Regulatory
Flexibility Analysis.’’
Summary of Final Regulatory
Flexibility Analysis
This analysis is required under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6). The collection of information
under this rule is based upon the
requirements under section 132(f). We
estimate that approximately 265,000
employers that provide qualified
transportation fringes to their employees
will be affected by the recordkeeping
requirements of this rule. None of the
comments received in response to the
notice of proposed rulemaking
specifically addressed the initial
regulatory flexibility analysis.
Section 132(f)(3) provides that
qualified transportation fringes may be
provided in the form of cash
reimbursement. The legislative history
indicates that an employer providing
cash reimbursement to the employer’s
employees for qualified transportation
fringes must establish a bona fide
reimbursement arrangement. As a
condition to providing cash
reimbursement for qualified
transportation fringes, this rule provides
that employers must receive
substantiation from employees. The
objective of this rule is to ensure that
reimbursements are made for qualified
transportation fringes.
Whether an arrangement constitutes a
bona fide reimbursement arrangement
varies depending on the facts and
circumstances, including the method or

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methods of payment utilized within a
mass transit system. An employee
certification in either written or
electronic form may be sufficient
depending upon the facts and
circumstances. For example, if receipts
are not provided in the ordinary course
of business, such as with respect to
metered parking or used transit passes
that cannot be returned to the user, an
employee certification that expenses
have been incurred constitutes a
reasonable reimbursement procedure. A
certification that expenses will be
incurred in the future, by itself, is not
a reasonable reimbursement procedure.
There are no particular professional
skills required to maintain these
records.
In addition, section 132(f)(4) provides
that an employee may choose between
cash compensation and qualified
transportation fringes. This rule
provides that an employer may allow an
employee the choice to 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). This
rule provides that employers must keep
records with respect to employee
compensation reduction elections. An
employee’s election must be in writing
or some other permanent and verifiable
form, and include the date of the
election, the amount of compensation to
be reduced, and the period for which
the qualified transportation fringes will
be provided. The objective of this rule
is to ensure against recharacterization of
taxable compensation after it has been
paid to the employee. There are no
particular professional skills required to
maintain these records.
A less burdensome alternative for
small organizations would be to exempt
those entities from the recordkeeping
requirements under this rule. However,
it would be inconsistent with the
statutory provisions and legislative
history to exempt those entities from the
recordkeeping requirements imposed
under this rule.
This rule provides several options
which avoid more burdensome
recordkeeping requirements for small
entities. This rule provides that (1) there
are no substantiation requirements if the
employer distributes transit passes in
kind; (2) a compensation reduction
election may be made electronically; (3)
an election to reduce compensation may
be automatically renewed; (4) an
employer may provide for deemed
compensation reduction elections under
its qualified transportation fringe benefit
plan; and (5) a requirement that a

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voucher be distributed in-kind by the
employer is satisfied if the voucher is
distributed by the employer or by
another person on behalf of the
employer (for example, if a transit
operator credits amounts to the
employee’s fare card as a result of
payments made to the operator by the
employer).

provided before January 1, 1993. For
benefits provided after December 31,
1992, see § 1.132–9.
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Par. 4. Section 1.132–9 is added to
read as follows:
§ 1.132–9

Drafting Information
The principal author of these
regulations is John Richards, Office of
the Assistant Chief Counsel (Exempt
Organizations/Employment Tax/
Government Entities). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 1
Employment taxes, Income taxes,
Reporting and recordkeeping
requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
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:
1. Adding an entry for § 1.132–5(p)(4)
2. Adding entries for § 1.132–9.
The additions read as follows:
§ 1.132–0 Outline of regulations under
section 132.

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§ 1.132–5

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Working condition fringes.

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(p) * * *
(4) Dates of applicability.
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§ 1.132–9

Qualified transportation fringes.

(a) Table of contents.
(b) Questions and answers.
Par. 3. Section 1.132–5 is amended by
adding paragraph (p)(4) to read as
follows:
§ 1.132–5

Working condition fringes.

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(p) * * *
(4) Dates of applicability. This
paragraph (p) applies to benefits

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Qualified transportation fringes.

(a) Table of contents. This section
contains a list of the questions and
answers in § 1.132–9.
(1) General rules.
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. May qualified transportation fringes
be provided to individuals who are not
employees?
Q–6. Must a qualified transportation fringe
benefit plan be in writing?
(2) Dollar limitations.
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?
(3) Compensation reduction.
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 may 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?
(4) Expense reimbursements.
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?
(5) Special rules for parking and vanpools.
Q–20. How is the value of parking
determined?
Q–21. How do the qualified transportation
fringe rules apply to van pools?
(6) Reporting and employment taxes.

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Q–22. What are the reporting and
employment tax requirements for qualified
transportation fringes?
(7) Interaction with other fringe benefits.
Q–23. How does section 132(f) interact
with other fringe benefit rules?
(8) Application to individuals who are not
employees.
Q–24. May qualified transportation fringes
be provided to individuals who are partners,
2-percent shareholders of S-corporations, or
independent contractors?
(9) Effective date.
Q–25. What is the effective date of this
section?

(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 for a year 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
(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 6 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 (including

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commuting by carpool, commuter
highway vehicle, mass transit facilities,
or transportation provided by any
person in the business of transporting
persons for compensation or hire).
(b) For purposes of section 132(f),
parking on or near the employer’s
business premises includes parking on
or near a work location at which the
employee provides services for the
employer. However, qualified parking
does not include—
(1) The value of parking provided to
an employee that is excludable from
gross income under section 132(a)(3) (as
a working condition fringe), or
(2) Reimbursement paid to an
employee for parking costs that is
excludable from gross income as an
amount treated as paid under an
accountable plan. See § 1.62–2.
(c) However, parking on or near
property used by the employee for
residential purposes is not qualified
parking.
(d) Parking is provided by an
employer if—
(1) The parking is on property that the
employer owns or leases;
(2) The employer pays for the parking;
or
(3) The employer reimburses the
employee for parking expenses (see Q/
A–16 of this section for rules relating to
cash reimbursements).
Q–5. May qualified transportation
fringes be provided to individuals who
are not employees?
A–5. An employer may provide
qualified transportation fringes only to
individuals who are currently
employees of the employer at the time
the qualified transportation fringe is
provided. The term employee for
purposes of qualified transportation
fringes is defined in § 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 per month is excludable from the
gross income of an employee for
transportation in a commuter highway
vehicle and transit passes provided by

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an employer. On January 1, 2002, this
amount is increased to $100 per month.
(b) Parking. Up to $175 per month is
excludable from the gross income of an
employee for qualified parking.
(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. (a) 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 § 1.61–21(b)(1).
(b) The following examples illustrate
the principles of this Q/A–8:
Example 1. (i) For each month in a year in
which the statutory monthly transit pass
limit is $100 (i.e., a year after 2001),
Employer M provides a transit pass valued at
$110 to Employee D, who does not pay any
amount to Employer M for the transit pass.
(ii) In this Example 1, because the value of
the monthly transit pass exceeds the
statutory monthly limit by $10, $120 ($110—
$100, times 12 months) must be included in
D’s wages for income and employment tax
purposes for the year with respect to the
transit passes.
Example 2. (i) For each month in a year in
which the statutory monthly qualified
parking limit is $175, 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 2, 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 the year
with respect to the qualified parking.
Example 3. (i) For each month in a year in
which the statutory monthly qualified
parking limit is $175, Employer P provides

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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 3, 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. (a) In general. 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 provided to an
employee, the applicable statutory
monthly limit applies to qualified
transportation fringes used by the
employee in a month. Monthly
exclusion amounts are not combined to
provide a qualified transportation fringe
for any month exceeding the statutory
limit. A month is a calendar month or
a substantially equivalent period
applied consistently.
(b) Transit passes. In the case of
transit passes provided to an employee,
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. In
addition, transit passes distributed in
advance for more than one month, but
not for more than twelve months, are
qualified transportation fringes if the
requirements in paragraph (c) of this Q/
A–9 are met (relating to the income tax
and employment tax treatment of
advance transit passes). The applicable
statutory monthly limit under section
132(f)(2) on the combined amount of
transportation in a commuter highway
vehicle and transit passes may be
calculated by taking into account the
monthly limits for all months for which
the transit passes are distributed. In the
case of a pass that is valid for more than
one month, such as an annual pass, the
value of the pass may be divided by the
number of months for which it is valid
for purposes of determining whether the
value of the pass exceeds the statutory
monthly limit.
(c) Rule if employee’s employment
terminates—(1) Income tax treatment.
The value of transit passes provided in
advance to an employee with respect to
a month in which the individual is not
an employee is included in the

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employee’s wages for income tax
purposes.
(2) Reporting and employment tax
treatment. Transit passes distributed in
advance to an employee are excludable
from wages for employment tax
purposes under sections 3121, 3306,
and 3401 (FICA, FUTA, and income tax
withholding) if the employer distributes
transit passes to the employee in
advance for not more than three months
and, at the time the transit passes are
distributed, there is not an established
date that the employee’s employment
will terminate (for example, if the
employee has given notice of
retirement) which will occur before the
beginning of the last month of the
period for which the transit passes are
provided. If the employer distributes
transit passes to an employee in
advance for not more than three months
and at the time the transit passes are
distributed there is an established date
that the employee’s employment will
terminate, and the employee’s
employment does terminate before the
beginning of the last month of the
period for which the transit passes are
provided, the value of transit passes
provided for months beginning after the
date of termination during which the
employee is not employed by the
employer is included in the employee’s
wages for employment tax purposes. If
transit passes are distributed in advance
for more than three months, the value of
transit passes provided for the months
during which the employee is not
employed by the employer is includible
in the employee’s wages for
employment tax purposes regardless of
whether at the time the transit passes
were distributed there was an
established date of termination of the
employee’s employment.
(d) Examples. 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 of a year in which the statutory monthly
parking limit is $175, for which E is
reimbursed $150 by Employer R. Employee E
incurs $180 in expenses for qualified parking
used during the month of July of that year,
for which E is reimbursed $180 by Employer
R.
(ii) In this Example 1, 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 Employee 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 March of a year (for which the statutory
monthly transit pass limit is $65) for January,

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February, and March of that year. F was hired
during January and has not received any
transit passes from G.
(ii) In this Example 2, the value of the
transit passes (three months times $65 equals
$195) is excludable from F’s wages for
income and employment tax purposes.
Example 3. (i) Employer S has a qualified
transportation fringe benefit plan under
which its employees receive transit passes
near the beginning of each calendar quarter
for that calendar quarter. All employees of
Employer S receive transit passes from
Employer S with a value of $195 on March
31 for the second calendar quarter covering
the months April, May, and June (of a year
in which the statutory monthly transit pass
limit is $65).
(ii) In this Example 3, because the value of
the transit passes may be calculated by taking
into account the monthly limits for all
months for which the transit passes are
distributed, the value of the transit passes
(three months times $65 equals $195) is
excludable from the employees’ wages for
income and employment tax purposes.
Example 4. (i) Same facts as in Example 3,
except that Employee T, an employee of
Employer S, terminates employment with S
on May 31. There was not an established date
of termination for Employee T at the time the
transit passes were distributed.
(ii) In this Example 4, because at the time
the transit passes were distributed there was
not an established date of termination for
Employee T, the value of the transit passes
provided for June ($65) is excludable from
T’s wages for employment tax purposes.
However, the value of the transit passes
distributed to Employee T for June ($65) is
not excludable from T’s wages for income tax
purposes.
(iii) If Employee T’s May 31 termination
date was established at the time the transit
passes were provided, the value of the transit
passes provided for June ($65) is included in
T’s wages for both income and employment
tax purposes.
Example 5. (i) Employer F has a qualified
transportation fringe benefit plan under
which its employees receive transit passes
semi-annually in advance of the months for
which the transit passes are provided. All
employees of Employer F, including
Employee X, receive transit passes from F
with a value of $390 on June 30 for the 6
months of July through December (of a year
in which the statutory monthly transit pass
limit is $65). Employee X’s employment
terminates and his last day of work is August
1. Employer F’s other employees remain
employed throughout the remainder of the
year.
(ii) In this Example 5, the value of the
transit passes provided to Employee X for the
months September, October, November, and
December ($65 times 4 months equals $260)
of the year is included in X’s wages for
income and employment tax purposes. The
value of the transit passes provided to
Employer F’s other employees is excludable
from the employees’ wages for income and
employment tax purposes.
Example 6. (i) Each month during a year
in which the statutory monthly transit pass
limit is $65, Employer R distributes transit

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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 6, because the value of
the transit passes distributed by Employer R
does not exceed the applicable statutory
monthly limit ($65), no portion of the value
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. (a) General rule. Yes. The
statutory monthly limits described in Q/
A–7 of this section apply to benefits
provided by an 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 section 414(t)
and § 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 monthly limit. In addition, an
individual who is treated as a leased
employee of the employer under section
414(n) is treated as an employee of that
employer for purposes of section 132.
See section 414(n)(3)(C).
(b) Examples. The following examples
illustrate the principles of this Q/A–10:
Example 1. (i) During a year in which the
statutory monthly qualified parking limit is
$175, 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 1, 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 Employers M and N are treated
as a single employer under section 414(b).
(ii) In this Example 2, 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 the monthly limit amount of $175
equals $25) for each month in the year is
includible in E’s wages for income and
employment tax purposes.

Q–11. May qualified transportation
fringes be provided to employees
pursuant to a compensation reduction
agreement?
A–11. Yes. An employer may offer
employees a choice between cash

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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) Automatic 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

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transportation in a commuter highway
vehicle, transit passes, and qualified
parking. For example, for a year in
which the statutory monthly limit is $65
for transportation in a commuter
highway vehicle and transit passes, and
$175 for qualified parking, an employee
could elect to reduce compensation for
any month by no more than $240 ($65
plus $175) 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 may the
amount be paid in cash to the
employee?
A–14. (a) The compensation reduction
election must satisfy the requirements
set forth under paragraphs (b), (c), and
(d) of this Q/A–14.
(b) 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. Thus, a
compensation reduction election must
relate to qualified transportation fringes
to be provided after the election. 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.
(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 (c) 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

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qualified transportation fringe benefit
plan may not provide that an employee
who ceases to participate in the
employer’s qualified transportation
fringe benefit plan (such as in the case
of termination of employment) is
entitled to receive a refund of the
amount by which the employee’s
compensation reductions exceed 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 during a year in which the
statutory monthly limit is $100 for
transportation in a commuter highway
vehicle and transit passes (2002 or later) and
$180 for qualified parking. Employees of P
are paid cash compensation 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 day of a
month to reduce his or her compensation
payable during that month in an amount up
to the applicable statutory monthly limit
($100 if the employee elects coverage for
transportation in a commuter highway
vehicle or a mass transit pass, or $180 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 1, 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 are
allowed to elect to reduce compensation up
to $280 per month ($100 plus $180).
(iii) The arrangement would also satisfy the
requirements of this Q/A–14 (and Q/A–13 of
this section) if employees are 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
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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 (for which the statutory monthly mass
transit limit 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 for the months of
January, February, and March.
(ii) In this Example 2, $65 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 period for
which the qualified transportation fringe will
be provided not begin before the election is
made to the extent the election relates to $65
worth of transit passes for January of the
year. The $65 for February is not taxable
because the election was for a future period
that includes at least one day in February.
(iii) However, 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 provided to Q for the
months of February, March, and April
(because the compensation reduction would
relate solely to fringes to be provided for a
period not beginning before the date of the
election and the amount provided does not
exceed the aggregate limit for the period, i.e.,
the sum of $65 for each of February, March,
and April). See Q/A–9 of this section for
rules governing transit passes distributed in
advance for more than one month.
Example 3. (i) Employee R elects to reduce
his compensation payable on March 1 of a
year (for which the statutory monthly parking
limit is $175) by $185 in exchange for
reimbursement by Employer T of parking
expenses incurred by Employee R for parking
on or near Employer T’s business premises
during the period beginning after the date of
the election through March. The election is
made on the preceding February 27.
Employee R incurs $10 in parking expenses
on February 28 of the year, and $175 in
parking expenses during the month of March.
On April 5 of the year, Employer T
reimburses Employee R $185 for the parking
expenses incurred on February 28, and
during March, of the year.
(ii) In this Example 3, no amount would be
includible in Employee R’s wages for income
and employment tax purposes because the
compensation reduction related solely to
parking on or near Employer R’s business
premises used during a period not beginning
before the date of the election and the
amount reimbursed for parking used in any
one month does not exceed the statutory
monthly limitation.

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?

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A–15. (a) Yes. An employee may carry
over unused compensation reduction
amounts to subsequent periods under
the plan of the employee’s employer.
(b) The following example illustrates
the principles of this Q/A–15:
Example. (i) By an election made before
November 1 of a year for which the statutory
monthly mass transit limit is $65, Employee
E elects to reduce compensation in the
amount of $65 for the month of November.
E incurs $50 in employee-operated commuter
highway vehicle expenses during November
for which E is reimbursed $50 by Employer
R, E’s employer. By an election made before
December, 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
the following January, 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 the next
year 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 Employee 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 term qualified
transportation fringe also includes cash
reimbursement for transit passes made
under a bona fide reimbursement
arrangement, but, in accordance with
section 132(f)(3), only if permitted
under paragraph (b) of this Q/A–16. The
reimbursement must be made under a
bona fide reimbursement arrangement
which meets the rules of paragraph (c)
of this Q/A–16. A payment made before
the date an expense has been incurred
or paid is not a reimbursement. In
addition, a bona fide reimbursement
arrangement does not include an
arrangement that is dependent solely
upon an employee certifying in advance
that the employee will incur expenses at
some future date.
(b) Special rule for transit passes—(1)
In general. The term qualified
transportation fringe includes cash
reimbursement for transit passes made

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Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
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. If a voucher is readily
available, the requirement that a
voucher be distributed in-kind by the
employer is satisfied if the voucher is
distributed by the employer or by
another person on behalf of the
employer (for example, if a transit
operator credits amounts to the
employee’s fare card as a result of
payments made to the operator by the
employer).
(2) Voucher or similar item. For
purposes of the special rule in
paragraph (b) of this Q/A–16, a transit
system voucher is an instrument that
may be purchased by employers from a
voucher provider 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. Thus, for example, a transit pass
that may be purchased by employers
directly from a voucher provider is a
transit system voucher.
(3) Voucher provider. The term
voucher provider means any person in
the trade or business of selling transit
system vouchers to employers, or any
transit system or transit operator that
sells vouchers to employers for the
purpose of direct distribution to
employees. Thus, a transit operator
might or might not be a voucher
provider. A voucher provider is not, for
example, a third-party employee
benefits administrator that administers a
transit pass benefit program for an
employer using vouchers that the
employer could obtain directly.
(4) Readily available. For purposes of
this paragraph (b), a voucher or similar
item is readily available for direct
distribution by the employer to
employees if and only if an employer
can obtain it from a voucher provider
that—
(i) does not impose fare media charges
that cause vouchers to not be readily
available as described in paragraph
(b)(5) of this section; and
(ii) does not impose other restrictions
that cause vouchers to not be readily
available as described in paragraph
(b)(6) of this section.
(5) Fare media charges. For purposes
of paragraph (b)(4) of this section, fare
media charges relate only to fees paid by
the employer to voucher providers for
vouchers. The determination of whether
obtaining a voucher would result in fare
media charges that cause vouchers to
not be readily available as described in
this paragraph (b) is made with respect

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to each transit system voucher. If more
than one transit system voucher is
available for direct distribution to
employees, the employer must consider
the fees imposed for the lowest cost
monthly voucher for purposes of
determining whether the fees imposed
by the voucher provider satisfy this
paragraph. However, if transit system
vouchers for multiple transit systems
are required in an area to meet the
transit needs of the individual
employees in that area, the employer
has the option of averaging the costs
applied to each transit system voucher
for purposes of determining whether the
fare media charges for transit system
vouchers satisfy this paragraph. Fare
media charges are described in this
paragraph (b)(5), and therefore cause
vouchers to not be readily available, if
and only if the average annual fare
media charges that the employer
reasonably expects to incur for transit
system vouchers purchased from the
voucher provider (disregarding
reasonable and customary delivery
charges imposed by the voucher
provider, e.g., not in excess of $15) are
more than 1 percent of the average
annual value of the vouchers for a
transit system.
(6) Other restrictions. For purposes of
paragraph (b)(4) of this section,
restrictions that cause vouchers to not
be readily available are restrictions
imposed by the voucher provider other
than fare media charges that effectively
prevent the employer from obtaining
vouchers appropriate for distribution to
employees. Examples of such
restrictions include—
(i) Advance purchase requirements.
Advance purchase requirements cause
vouchers to not be readily available only
if the voucher provider does not offer
vouchers at regular intervals or fails to
provide the voucher within a reasonable
period after receiving payment for the
voucher. For example, a requirement
that vouchers may be purchased only
once per year may effectively prevent an
employer from obtaining vouchers for
distribution to employees. An advance
purchase requirement that vouchers be
purchased not more frequently than
monthly does not effectively prevent the
employer from obtaining vouchers for
distribution to employees.
(ii) Purchase quantity requirements.
Purchase quantity requirements cause
vouchers to not be readily available if
the voucher provider does not offer
vouchers in quantities that are
reasonably appropriate to the number of
the employer’s employees who use mass
transportation (for example, the voucher
provider requires a $1,000 minimum

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2249

purchase and the employer seeks to
purchase only $200 of vouchers).
(iii) Limitations on denominations of
vouchers that are available. If the
voucher provider does not offer
vouchers in denominations appropriate
for distribution to the employer’s
employees, vouchers are not readily
available. For example, vouchers
provided in $5 increments up to the
monthly limit are appropriate for
distribution to employees, while
vouchers available only in a
denomination equal to the monthly
limit are not appropriate for distribution
to employees if the amount of the
benefit provided to the employer’s
employees each month is normally less
than the monthly limit.
(7) Example. The following example
illustrates the principles of this
paragraph (b):
Example. (i) Company C in City X sells
mass transit vouchers to employers in the
metropolitan area of X in various
denominations appropriate for distribution to
employees. Employers can purchase
vouchers monthly in reasonably appropriate
quantities. 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. To cover its operating expenses, C
imposes on each voucher a 50 cents charge,
plus a reasonable and customary $15 charge
for delivery of each order of vouchers.
Employer M disburses vouchers purchased
from C to its employees who use operators
that accept the vouchers and M reasonably
expects that $55 is the average value of the
voucher it will purchase from C for the next
calendar year.
(ii) In this Example, vouchers for X are
readily available for direct distribution by the
employer to employees because the expected
cost of the vouchers disbursed to M’s
employees for the next calendar year is not
more than 1 percent of the value of the
vouchers (50 cents divided by $55 equals
0.91 percent), the delivery charges are
disregarded because they are reasonable and
customary, and there are no other restrictions
that cause the vouchers to not be readily
available. Thus, any reimbursement of mass
transportation costs in X would not be a
qualified transportation fringe.

(c) Substantiation requirements.
Employers that make cash
reimbursements must establish a bona
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),
whether cash reimbursements are made
under 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

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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
expense must be substantiated within a
reasonable period of time. An expense
substantiated to the payor within 180
days after it has been paid will be
treated as having been substantiated
within a reasonable period of time. An
employee certification at the time of
reimbursement in either written or
electronic form may be a reasonable
reimbursement procedure depending on
the facts and circumstances. Examples
of reasonable reimbursement procedures
are set forth in paragraph (d) of this Q/
A–16.
(d) Illustrations of reasonable
reimbursement procedures. The
following are examples of reasonable
reimbursement procedures for purposes
of paragraph (c) of this Q/A–16. In each
case, the reimbursement is made at or
within a reasonable period after the end
of the events described in paragraphs
(d)(1) through (d)(3) of this section.
(1) An employee presents to the
employer a parking expense receipt for
parking on or near the employer’s
business premises, the employee
certifies that the parking was used by
the employee, and the employer has no
reason to doubt the employee’s
certification.
(2) An employee either submits a used
time-sensitive transit pass (such as a
monthly pass) to the employer and
certifies that he or she purchased it or
presents an unused or used transit pass
to the employer and certifies that he or
she purchased it and the employee
certifies that he or she has not
previously been reimbursed for the
transit pass. 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. (a) General rule. Yes. Qualified
transportation fringes include
reimbursement to employees for costs
incurred for transportation in more than
one month, provided the reimbursement
for each month in the period is
calculated separately and does not

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exceed the applicable statutory monthly
limit for any month in the period. See
Q/A–8 and 9 of this section if the limit
for a month is exceeded.
(b) Example. 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 through June 30 of a year
in which the statutory monthly qualified
parking limit is $175. After receiving
adequate substantiation from Employee R,
R’s employer reimburses R $300 in cash on
June 30 of that year.
(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

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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 6 adults (excluding the driver). See
Q/A–16(b) and (c) of this section for a
special rule for cash reimbursement for
transit passes and the substantiation
requirements for cash reimbursement.
(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 § 1.61–21(d), the
vehicle cents-per-mile rule in § 1.61–
21(e), or the commuting valuation rule
in § 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 § 1.61–21(c)(2)(i)(B).
(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.

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Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
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
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) is
treated as paid for employment tax
purposes when actually or
constructively paid. See §§ 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 (without any direct or
indirect compensation reduction

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election), 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 §§ 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). See
also Q/A–4(b) of this section.
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 §§ 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 § 1.132–
6(d)(1). However, if the value of a pass
provided in a month exceeds the dollar
amount specified in § 1.132–6(d)(1), the
full value of the benefit provided (not
merely the amount in excess of the
dollar amount specified in § 1.132–
6(d)(1)) is includible in gross income.
(c) Parking. The working condition
fringe rules under section 132(d) do not

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apply to commuter parking. See
§ 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, 2percent shareholders, or independent
contractors that qualifies under the de
minimis rules. See § 1.132–6(a) and (b).
(d) Example. 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
§ 1.132–6.

Q–25. What is the effective date of
this section?
A–25. (a) Except as provided in
paragraph (b) of this Q/A–25, this
section is applicable for taxable years
beginning after December 31, 2001.
(b) The last sentence of paragraph
(b)(5) of Q/A–16 of this section (relating
to whether transit system vouchers for
transit passes are readily available) is
effective for taxable years beginning
after December 31, 2003.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 6. In § 602.101, paragraph (b) is
amended by adding an entry in
numerical order to the table to read as
follows:
§ 602.101

*

*

OMB Control numbers.

*

*

*

(b)
CFR part or section where
identified and described

*
*
*
1.132–9(b) ............................
*

*

*

Current OMB
control No.

*

*

*
1545–1676
*

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 29, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01–294 Filed 1–10–01; 8:45 am]
BILLING CODE 4830–01–P

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