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Transit agency commute benefit programs received a boost in September from the U.S. Department of the Treasury, which stated that, for employers to get transit-related tax benefits, they must distribute transit passes and vouchers directly to employees and cannot simply pay cash to those who say they use transit.
Federal law allows employers to provide up to $1,200 a year in transit passes tax-free to employees who ride public transit.
The clarification takes aim at companies that give employees tax-free cash instead of a transit pass. According to the Treasury, "the exclusion under 132(f) is available only if the employer distributes vouchers or transit passes to employees, the employer may not use a cash reimbursement system."
The letter clarified that employers will still be able to use cash reimbursement methods, but only if there are fees or other significant restrictions imposed by transit agencies.
The Treasury Department outlined its position in a Sept. 16 letter to U.S. Sen. Paul Sarbanes (D-Md.), chairman of the Senate Banking Committee. The senator, who has long been a supporter of transit, had inquired into the practice of cash reimbursement in an Aug. 8 letter to Treasury Secretary Paul O'Neill.
According to the Treasury Department, "In any cases in which there are no fees or other restrictions imposed. then under the regulations..which went into effect on Jan. 1, 2002, transit passes are considered readily available." Applicable law bars employers from providing cash where transit passes or vouchers exchangeable only for transit passes are readily available.
Regulations issued by the Treasury Department in 2001 stated that transit passes or vouchers must be used unless fees for using them exceed 1 percent of the face value. However, this section of the regulations does not go into effect until 2004. Until now, some employers and tax experts had taken the position that cash reimbursement was allowed until then.
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