As a result of COVID-19, employees may be commuting less frequently to work, have changed their method of commuting (i.e. driving v. public transportation) or switched to telework. If your employees participate in a qualified transportation plan, they may have unused benefits.
The IRS has released Information Letter 2020-2024 providing the following options for calendar year 2020:
- Unused compensation reduction amounts can be carried over to subsequent periods under an employer’s plan and used for future commuting expenses, so long as the employee has made a valid compensation reduction election and remains employed by the employer.
- Unused amounts can be applied to another qualified transportation fringe, (i.e. transit pass to qualified parking), to the extent that the other benefit is offered under the employer’s plan and the maximum monthly amount for that benefit is not exceeded.
Caution: The qualified transportation plan rules do not allow for refunds of qualified transportation fringe benefits that are provided through a compensation reduction agreement.
Employers that have not already done so may wish to revisit their plan documents in light of the COVID-19 pandemic and make appropriate adjustments to permit the new flexibility allowances authorized by the IRS. The following steps may help you determine what you can to minimize the pandemic’s effect on your employees’ transportation benefits:
- Review your plan. Most plans give participants considerable freedom to stop or right-size their compensation reduction elections. Most also allow participants to carry over unused balances during employment. So, your plan may already give employees the ability to pause or decrease their compensation reductions during a period of temporary remote work, and to carry any unused balances over until they resume commuting. If your plan is less flexible than it could be, consider amending it to make it easier for employees to control their accumulating balances (e.g., by allowing participants to reduce or stop their elections more frequently) and maximize their ability to carry balances forward for later use (e.g., by removing limits on carryovers).
- Communicate with employees. Be sure to remind employees who no longer need transportation benefits that they can stop or reduce their compensation reductions. And if employees are accumulating balances you suspect they will never use, consider amending the plan to stop compensation reductions for employees in jobs that have permanently changed to telecommuting positions.
- Clarify laid-off employees’ status. Qualified transportation plans cannot reimburse expenses unless they are incurred or paid during employment. You should determine whether employees who have been “laid off” are still participating employees or are former employees who can no longer participate. Most plans allow former employees to be reimbursed for expenses incurred or paid prior to termination, so former employees should be encouraged to submit all pre-termination reimbursable expenses before the end of the plan’s run-out period (i.e., the period after termination during which reimbursement claims may be submitted). You might also lengthen the run-out period, subject to the regulations’ requirement that expenses be substantiated within a “reasonable period of time.”
Please be aware that the determination of the requirements and the application of specific laws and regulations to each employee welfare plan and/or employer may differ due to a number of variables. Nothing in this newsletter should be construed as tax or legal advice.