The Internal Revenue Service released a technical advice memorandum explaining that employers choosing to provide employees retroactive cash reimbursements for substantiated transit expenses must do so only if providing those reimbursements in taxable form. The transit parity rules signed into law as part of the Consolidated Appropriates Act of 2016 (December 2015) increased commuting limits to be in parity with the higher parking limit. These parity rules had retroactive effect allowing for reimbursements for prior substantiated, qualified transit expenses.

  • If transit passes are readily available in the employer’s area, the Code does not provide an income or employment tax exclusion for transit benefits paid to employees in cash.
  • If transit passes were not readily available in an area such that employers were permitted to provide transit benefits in the form of cash reimbursements, such benefits must be provided under a bona fide reimbursement arrangement for expenses actually incurred and substantiated by employees, as described in §1.132-9 Q/A 16(c).
  • Section 132(f)(3) includes cash reimbursement for transit benefits, only if a voucher may be exchanged only for a transit pass and is not readily available for direct cash distribution.

Next Steps

  • Employers with IRC §132(f) commuter benefit plans or readily available transit voucher programs should review this memo should they be considering providing retroactive reimbursement of transit benefits. Employers are not mandated to provide retroactive reimbursements. Should an employee desire retroactive reimbursement and the employer not wish to be involved, individuals may seek such reimbursements through their individual tax filings.
  • For complete details, see IRS Memorandum on the Tax Treatment of Retroactive Transit Benefits.