In Information Letter 2019-002, the IRS has confirmed that unused transportation benefits will be forfeited when an employee terminates employment.
Qualified transportation fringe benefits include: (i) transportation between the employee’s residence and place of employment; (ii) transit passes; (iii) qualified parking; and (iv) certain bicycle commuting expenses. The benefits may be paid by the employer, or through pre-tax employee contributions. Maximum benefits are limited to specified, indexed amounts.
In the letter, the IRS said that an employer may provide qualified transportation fringe benefits only to individuals “who are current employees of the employer when the qualified transportation fringe is provided. Employers cannot continue providing qualified transportation fringes to individuals who are no longer employees.” This rule applies regardless of whether the benefits are provided in addition to an employee’s regular compensation or through pre-tax employee contributions.
Therefore, when an employee is fired, compensation reduction amounts are not refundable to the employee even when the employee’s contributions exceed the actual qualified transportation benefits received. “This rule does not distinguish between employees who are fired (or involuntarily terminated) and those that quit their employment voluntarily.”
NOTE: While this rule is similar to the “use-it-or-lose-it” rule for flexible spending accounts in cafeteria plans, employees are permitted to change their transportation benefit contribution elections every month, and do not require a “status change” event to make the change, so the amounts forfeited in transportation benefit elections should be substantially smaller than the potential loss in FSAs, where employees are generally required to make annual elections.