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Transportation Fringe Benefit Contributions May Not Be Reimbursed to Employee

by | Jun 14, 2024 |

In Information Letter 2024-004, the IRS has reiterated that contributions to a qualified transportation fringe benefits plan may not be reimbursed, even if the employee could not commute because of COVID restrictions.

The employee requesting the letter explained that COVID-19 restrictions prevented her from commuting and then changed her commuting routine so that she no longer had reimbursable commuting expenses.

Law.  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.

IRS regulations allow employers to provide qualified transportation fringes through compensation reduction agreements.  In the compensation reduction agreement, employees may designate a portion of the amount they otherwise would receive as compensation to fund qualified transportation fringe benefits provided by their employer.  The compensation reduction is excluded from an employee’s income and wages for federal tax purposes if the employee uses the compensation reduction amount exclusively to fund qualified transportation fringe benefits.

While this rule is similar to the rules for flexible spending account contributions, in this case, employees are permitted to change their transportation benefit contribution elections every month, do not require a “status change” event to make the change, and use the contributions for any qualified transportation benefit.

Information Letter.  The IRS noted that the regulations specify that amounts set aside under a compensation reduction agreement are not refundable other than by payment of another qualified transportation fringe under the employer’s plan.  However, it also noted that unlike flexible spending accounts, when an employee elects to reduce her compensation for a month by an amount that exceeds the qualified transportation fringe expenses actually incurred in that month, the employer may apply this excess towards qualified transportation fringe expenses incurred in future months.

Information Letter 2024-004 is available at: