Final Regs Clarify Rules on Employer-Provided Transportation; Set Transit Pass Exclusion at $21

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final amendments of two provisions of the fringe benefit regulations concerning the taxation and valuation of fringe benefits and exclusion from gross income for certain fringe benefits. The final amendments affect any person providing or receiving these fringe benefits and provide these persons with the guidance necessary to comply with the law.

 EFFECTIVE DATE: The final amendments to the fringe benefit regulations are effective July 1, 1991.

 FOR FURTHER INFORMATION CONTACT: Marianna Dyson at 202-377-9372 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On May 20, 1991, a notice of proposed rulemaking was published in the Federal Register (26 FR 23038). The notice contains proposed amendments to the fringe benefit regulations under sections 61 and 132 of the Internal Revenue Code of 1986 (Code). These proposed amendments provide guidance on the tax treatment of certain transportation provided by an employer to or from an employee's workplace due to unsafe conditions surrounding the employee's workplace or residence and increase the dollar amount of the de minimis exclusion for public transit passes provided to employees for commuting on public transit systems.

 Comments were received from the public, and on July 1, 1991, the Internal Revenue Service held a public hearing concerning the proposed amendments. In response to the comments received and the statements made at the public hearing, the proposed amendments have been adopted as revised by this Treasury decision.

 The amendments to the final regulations contained in this document apply as of July 1, 1991. The amendments to the final regulations under section 61 are contained in section 1.61-21. The amendments to the final regulations under section 132 are contained in section 1.132-6.

SUMMARY OF COMMENTS AND EXPLANATION OF PROVISIONS

1.INTERACTION OF EMPLOYER-PROVIDED TRANSPORTATION DUE TO UNSAFE CONDITIONS RULE AND EXISTING DE MINIMIS TRANSPORTATION FARE RULES

 Numerous commentators requested clarification of the interaction between the new commuting valuation rule and the two employer- provided transportation fare rules contained in the de minimis fringe benefit regulations under section 132(e) of the Code. Under the first de minimis fringe rule, section 1.132-6(d)(2)(i), the value of local transportation fare is totally excludable from gross income as a de minimis fringe for any employee (regardless of income), if the benefit is reasonable and is provided on an occasional basis because overtime requires an extension of the employee's normal work schedule.

 The second de minimis fringe rule, which is contained in section 1.132-6(d)(2)(iii), provides only a partial de minimis exclusion for local transportation furnished to employees for use in commuting to and from work because of unusual circumstances. This exclusion is available only to "noncontrol" employees who are provided local transportation because it is unsafe to use other available means of transportation. The determination of unusual circumstances is made with respect to the employee receiving the transportation and is based on the facts and circumstances. For example, situations in which an employee is asked to work outside his normal work hours or to make a temporary shift change are considered unusual. Factors indicating unsafe conditions are the history of crime in the geographic area surrounding the employee's workplace or residence and the time of day during which the employee must commute. If unusual circumstances and unsafe conditions exist and the employer transports the employee between work and home, the excess of the value of each one-way commute over $1.50 is excludable from the employee's gross income, provided the employee is not a control employee. For 1991, the definition of control employee under section 1.61-21(f)(5) includes officers, directors, one-percent owners, or any employees earning $121,070 or more. For government employees, the definition of control employee under section 1.61-21(f)(6) covers any elected official or any employee earning $101,300 or more.

 Unlike the rules of exclusion set forth in section 1.132-6(d)(2)(i) & (iii), the special valuation rule of section 1.61-21(k) does not have an overtime or unusual circumstances work requirement. The new rule applies to situations in which local transportation fare is provided to qualified employees who, under appropriate circumstances, are receiving the benefit, even though their regular working hours have not been extended or changed. The most typical example is the qualified night shift worker who does not work overtime, but is provided transportation to work each evening because of unsafe conditions. The special valuation rule applies if an employee is a "nonexempt" employee subject to the Fair Labor Standards Act of 1938 (as amended), 29 U.S.C. sections 210-219 (FLSA), earns less than S60,535 in 1991, and receives local transportation to or from work because of security concerns (i.e., at the time of day the employee would ordinarily walk or use public transportation, these forms of commuting would be considered unsafe by a reasonable person). If the rule applies, the excess of the value of each one-way commute over $1.50 is excludable from the employee's gross income.

 The absence of an overtime or unusual circumstances work requirement does not mean that the rule is available only to employees who receive the benefit before or after their regular work shifts. The rule may also be used to value transportation provided to employees who work overtime, provided that they otherwise meet the requirements of the regulation. For example, a day-shift employee may frequently work overtime into the evening hours, at which time the employee's usual means of commuting between work and home (i.e., walking or using public transportation) would be considered unsafe. If transportation home is furnished to the employee on more than an occasional basis, the transportation would not be excludable under section 1.132-6(d)(2)(i) as a de minimis fringe. Similarly, if the transportation is provided under circumstances that do not qualify as unusual, the value of the benefits in excess of $1.50 per one-way commute would not be excludable under section 1.132-6(d)(2)(iii). With the implementation of the new rule, the transportation home may be valued at $1.50 per trip, provided the day-shift employee is qualified within the meaning of section 1.61-21(k) and unsafe conditions exist.

ALTERNATIVE TRANSPORTATION: WALKING OR USING PUBLIC TRANSPORTATION

 Commentators suggested that the new commuting valuation rule should be expanded to include transportation or transportation fare provided to employees other than those who would otherwise walk or use public transportation to commute to and from work.

 The purpose of the new rule is to assist lower-paid non- professionals who would ordinarily walk or use public transportation when commuting, but are unable to do so because of unsafe conditions at the time of day they must commute. Therefore, the rule in the final regulations has not been expanded to cover employees who have other modes of transportation available to them.

 It was also suggested that guidance should be given as to how or whether employers should investigate or substantiate the employee's alternative mode of commuting to and from work. In the interest of avoiding unnecessary complexity, the final regulations do not offer additional guidelines, but rely instead on employers' ability to make proper determinations through existing personnel management procedures. To alleviate employer concerns that absolute certainty is required on a day-by-day basis when determining alternative mode of transportation available to the employee, the final regulations provide that the valuation rule is available to employees who would ORDINARILY walk or use public transportation.

DEFINITION OF EMPLOYER-PROVIDED TRANSPORTATION

Several commentators questioned whether the definition of "employer-provided transportation" includes cash reimbursements for transportation paid directly by employees or whether the definition is limited to transportation provided by the employer pursuant to an agreement with an independent taxi or car service company. The most typical example of a cash reimbursement involves the small employer that does not have an account with a car service company, but reimburses qualified employees for cab rides. To address this concern, the final regulations provide that cash reimbursements made by an employer to an employee to cover the cost of purchasing transportation from an unrelated third party (i.e., hiring a cab) will be treated as employer-provided transportation, provided the reimbursement is made under a bona fide reimbursement arrangement.

 In addition, commentators inquired as to whether the definition of "employer-provided transportation" includes transportation in an employer-owned or leased vehicle. The requirement that the transportation be purchased from a party that is not related to the employer has not been expanded in the final regulations because the regulations under section 61 of the Code already provide special valuation rules for commuting in employer-provided vehicles. For example, employers desiring to use employer-owned or leased automobiles may rely on the rules relating to employer-provided van- pools and vehicles covered by written "commuting-only" policies. See section 1.61-21(f).

HOURLY, NONEXEMPT EMPLOYEES

Many commentators requested clarification of the requirement that employees must be "paid on an hourly basis" in order to be qualified. The final regulations provide that if an employee's compensation is stated on an annual basis, the employee may nonetheless be treated as "paid on an hourly basis," provided the employee is not claimed to be exempt from the minimum wage and maximum hour provisions of the FLSA and is paid overtime wages either equal to or exceeding one-and-a-half times the employee's regular hourly rate of pay.

DEFINITION OF COMPENSATION

In the interest of consistency, the final regulations modify the proposed regulations to provide that the definition of "compensation" under the new valuation rule is the same as the definition of "compensation" used for purposes of applying the commuting valuation rule of section 1.61-21(f) and the partial de minimis exclusion of section 1.132-6(d)(2)(iii). Thus, an employer relying on any of these three rules must determine compensation in the same manner for all employees.

2. PUBLIC TRANSIT PASSES

DOLLAR INCREASE FROM $15 TO $21

Numerous comments were received that increasing the de minimis exclusion for public transit passes from $15 to $21 was not sufficient to promote use of public transportation. The $15 de minimis exclusion for public transit passes arises out of the legislative history accompanying the Tax Reform Act of 1984, Pub. L. No. 98-369, section 531, 98 Stat. 494, which added section 132(e) to the Code. Under section 132(e), property or services not otherwise tax-free are excluded from gross income if (after taking into account the frequency with which they are provided) the value of the benefits is so small that accounting for the property or service would be unreasonable or administratively impracticable. The legislative history to the Act specifically lists monthly transit passes provided at a discount not exceeding $15 as an example of a de minimis fringe benefit. H.R. Rep. No. 861, 98th Cong., 2d Sess. 1168 (1984), 1984-3 (Vol. 2) C.B. 422. Increasing the $15 de minimis exclusion for transit passes to $21 to reflect the cost of living furthers the Congressional purpose underlying the directive in the legislative history concerning public transit passes. Thus, the cost-of-living adjustment for public transit passes should not be read as an expansion of the limits otherwise set forth in section 1.132-6 with respect to value or frequency of de minimis fringes.

REIMBURSEMENTS FOR PUBLIC TRANSIT COMMUTING EXPENSES

The final regulations provide that reimbursements made by an employer to an employee after December 31, 1988, to cover the cost of commuting on a public transit system are excludible as de minimis fringes under section 132(e) provided that the employee does not receive more than $21 ($15 for months ending before July 1, 1991) in such reimbursements with respect to commuting costs paid in any given month. Under this provision, the reimbursements must be made under a bona fide reimbursement arrangement. In lieu of requiring substantiation each time an employee incurs an expense for commuting on a public transit system, a reimbursement arrangement will be treated as bona fide if the employer establishes appropriate procedures for periodically verifying that the employee's use of public transportation for commuting is consistent with the value of the benefit provided by the employer for that purpose.

 The provision allowing for cash reimbursements comports with the legislative clarification in the Senate Finance Committee Report to the Tax Reform Act of 1986, S. Rep. No. 313, 99th Cong., 2d Sess. 1026 (1986). Specifically, the report indicates that the de minimis fringe exclusion includes tokens, vouchers, and reimbursements to cover the costs of commuting by public transit, as long as the amount provided by the employer does not exceed $15 a month ($180 a year). The report also provides that the value of all such transit benefits (including any discounts on passes) furnished to the same individual are aggregated for purposes of determining whether the $15 limit is exceeded. The clarification applies to reimbursements paid after December 31, 1988.

SPECIAL ANALYSIS

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Marianna Dyson, Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations), Internal Revenue Service. However, personnel from other offices of the Service and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR 1.61-1 THROUGH 1.133-1T

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8389

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority for part 1 is amended in part by removing the first authority citation for section 1.61-2T et al and by adding the following new citations in numerical order to read as follows:

Authority: Sec. 7805, 68A Stat. 917 (26 U.S.C. 7805) * * * Sec. 1.61-2T also issued under 26 U.S.C. 61; Sec. 1.61-21 also issued under 26 U.S.C. 61 * * * Sections 1.132-0 through 1.132-8T also issued under 26 U.S.C. 132 * * *

Par. 2. Section 1.61-21(k) is added to read as follows:

SECTION 1.61-21 TAXATION OF FRINGE BENEFITS.

* * * * *

(k) COMMUTING VALUATION RULE FOR CERTAIN EMPLOYEES -- (1) IN GENERAL. Under the rule of this paragraph (k), the value of the commuting use of employer-provided transportation may be determined under paragraph (k)(3) of this section if the following criteria are met by the employer and employee with respect to the transportation:

(i) The transportation is provided, solely because of unsafe conditions, to an employee who would ordinarily walk or use public transportation for commuting to or from work;

(ii) The employer has established a written policy (e.g., in the employer's personnel manual) under which the transportation is not provided for the employee's personal purposes other than for commuting due to unsafe conditions and the employer's practice in fact corresponds with the policy;

(iii) The transportation is not used for personal purposes other than commuting due to unsafe conditions; and

(iv) The employee receiving the employer-provided transportation is a qualified employee of the employer (as defined in paragraph (k)(6) of this section).

(2) TRIP-BY-TRIP BASIS. The special valuation rule of this paragraph (k) applies on a trip-by-trip basis. If an employer and employee fail to meet the criteria of paragraph (k)(1) of this section with respect to any trip, the value of the transportation for that trip is not determined under paragraph (k)(3) of this section and the amount includible in the employee's income is determined by reference to the fair market value of the transportation.

(3) COMMUTING VALUE -- (i) $1.50 PER ONE-WAY COMMUTE. If the requirements of this paragraph (k) are satisfied, the value of the commuting use of the employer-provided transportation is $1.50 per one-way commute (i.e., from home to work or from work to home).

(ii) VALUE PER EMPLOYEE. If transportation is provided to more than one qualified employee at the same time, the amount includible in the income of each employee is $1.50 per one-way commute.

(4) DEFINITION OF EMPLOYER-PROVIDED TRANSPORTATION. For purposes of this paragraph (k), "employer-provided transportation" means transportation by vehicle (as defined in paragraph (f)(4) of this section) that is purchased by the employer (or that is purchased by the employee and reimbursed by the employer) from a party that is not related to the employer for the purpose of transporting a qualified employee to or from work. Reimbursements made by an employer to an employee to cover the cost of purchasing transportation (e.g., hiring cabs) must be made under a bona fide reimbursement arrangement.

(5) UNSAFE CONDITIONS. Unsafe conditions exist if a reasonable person would, under the facts and circumstances, consider it unsafe for the employee to walk to or from home, or to walk to or use public transportation at the time of day the employee must commute. One of the factors indicating whether it is unsafe is the history of crime in the geographic area surrounding the employee's workplace or residence at the time of day the employee must commute.

"(6) QUALIFIED EMPLOYEE DEFINED -- (i) IN GENERAL. For purposes of this paragraph (k), a qualified employee is one who meets the following requirements with respect to the employer:

(A) The employee performs services during the current year, is paid on an hourly basis, is not claimed under section 213(a)(1) of the Fair Labor Standards Act of 1938 (as amended), 29 U.S.C. sections 201-219 (FLSA), to be exempt from the minimum wage and maximum hour provisions of the FLSA, and is within a classification with respect to which the employer actually pays, or has specified in writing that it will pay, compensation for overtime equal to or exceeding one and one-half times the regular rate as provided by section 207 of the FLSA; and

(B) The employee does not receive compensation from the employer in excess of the amount permitted by section 414(q)(1)(C) of the Code.

(ii) "COMPENSATION" AND "PAID ON AN HOURLY BASIS" DEFINED. For purposes of this paragraph (k), "compensation" has the same meaning as in section 414(q)(7). Compensation includes all amounts received from all entities treated as a single employer under section 414(b), (c), (m), or (o). Levels of compensation shall be adjusted at the same time and in the same manner as provided in section 415(d). If an employee's compensation is stated on an annual basis the employee is treated as "paid on an hourly basis" for purposes of this paragraph (k) as long as the employee is not claimed to be exempt from the minimum wage and maximum hour provisions of the FLSA and is paid overtime wages either equal to or exceeding one and one-half the employee's regular hourly rate of pay.

(iii) FLSA COMPLIANCE REQUIRED. An employee will not be considered a qualified employee for purposes of this paragraph (k), unless the employer is in compliance with the recordkeeping requirements concerning that employee's wages, hours, and other conditions and practices of employment as provided in section 211(c) of the FLSA and 29 CFR part 516.

(iv) ISSUES ARISING UNDER THE FLSA. If questions arise concerning an employee's classification under the FLSA, the pronouncements and rulings of the Administrator of the Wage and Hour Division, Department of Labor are determinative.

(v) NON-QUALIFIED EMPLOYEES. If an employee is not a qualified employee within the meaning of this paragraph (k)(6), no portion of the value of the commuting use of employer-provided transportation is excluded under this paragraph (k).

(7) EXAMPLES. This paragraph (k) is illustrated by the following examples:

EXAMPLE 1. A and B are word-processing clerks employed by Y, an accounting firm in a large metropolitan area, and both are qualified employees under paragraph (k)(6) of this section. The normal working hours for A and B are from 11:00 p.m. until 7:00 a.m. and public transportation, the only means of transportation available to A or B, would be considered unsafe by a reasonable person at the time they are required to commute from home to work. In response, Y hires a car service to pick up A and B at their homes each evening for purposes of transporting them to work. The amount includible in the income of both A and B is $1.50 for the one-way commute from home to work.

EXAMPLE 2. Assume the same facts as in Example 1, except that Y also hires a car service to return A and B to their homes each morning at the conclusion of their shifts and public transportation would not be considered unsafe by a reasonable person at the time of day A and B commute to their homes. The value of the commute from work to home is includible in the income of both A and B by reference to fair market value since unsafe conditions do not exist for that trip.

EXAMPLE 3. C is an associate for Z, a law firm in a metropolitan area. The normal working hours for C's law firm are from 9:00 a.m. until 6:00 p.m., but C's ordinary office hours are from 10:00 a.m. until 8:00 p.m. Public transportation, the only means of transportation available to C at the time C commutes from work to home during the evening, would be considered unsafe by a reasonable person. In response, Z hires a car service to take C home each evening. C does not receive annual compensation from Z in excess of the amount permitted by section 414(q)(1)(C) of the Code. However, C is treated as an employee exempt from the provisions of the FLSA and, accordingly, is not paid overtime wages. Therefore, C is not a qualified employee within the meaning of paragraph (k)(6) of this section. The value of the commute from work to home is includible in C's income by reference to fair market value.

(8) EFFECTIVE DATE. This paragraph (k) applies to employer- provided transportation provided to a qualified employee on or after July 1, 1991.

Par. 3. Section 1.132-6 is amended as follows:

1. Paragraph (d)(1) is revised.

2. The second sentence of paragraph (d)(3) is revised.

3. The last sentence of paragraph (d)(4) is revised.

4. The revisions read as follows:

SECTION 1.132-6 DE MINIMIS FRINGES.

* * * * *

(d) * * *

(1) TRANSIT PASSES. A public transit pass provided at a discount to defray an employee's commuting costs may be excluded from the employee's gross income as a de minimis fringe if such discount does not exceed $21 in any month. The exclusion provided in this paragraph (d)(1) also applies to the provision of tokens or fare cards that enable an individual to travel on the public transit system if the value of such tokens and fare cards in any month does not exceed by more than $21 the amount the employee paid for the tokens and fare cards for such month. Similarly, the exclusion of this paragraph (d)(1) applies to the provision of a voucher or similar instruments that is exchangeable solely for tokens, fare cards, or other instruments that enable the employee to use the public transit system if the value of such vouchers and other instruments in any month does not exceed $21. The exclusion of this paragraph (d)(1) also applies to reimbursements made by an employer to an employee after December 31, 1988, to cover the cost of commuting on a public transit system, provided the employee does not receive more than $21 in such reimbursements for commuting costs in any given month. The reimbursement must be made under a bona fide reimbursement arrangement. A reimbursement arrangement will be treated as bona fide if the employer establishes appropriate procedures for verifying on a periodic basis that the employee's use of public transportation for commuting is consistent with the value of the benefit provided by the employer for that purpose. The amount of in-kind public transit commuting benefits and reimbursements provided during any month that are excludible under this paragraph (d)(1) is limited to $21. For months ending before July 1, 1991, the amount is $15 per month. The exclusion provided in this paragraph (d)(1) does not apply to the provision of any benefit to defray public transit expenses incurred for personal travel other than commuting.

* * * * *

(3) * * * For example, the fact that $252 (i.e., $21 per month for 12 months) worth of public transit passes can be excluded from gross income as a de minimis fringe in 1992 does not mean that any fringe benefit with a value equal to or less than $252 may be excluded as a de minimis fringe. * * *

(4) * * * * For example, if, in 1992 an employer provides a $50 monthly public transit pass, the entire $50 must be included in income, not just the excess value over $21.

* * * * *