IRS Sets Speed Limits on Debit Card Use with Transportation Plans

In the past, administering debit cards for Section 132 Transportation Plans was like driving the German Autobahn. Few limitations existed beyond some general regulations issued before the advent of debit cards.

In November, the IRS erected speed limit signs.

More than two years after formally requesting comments on Transportation Plan debit cards, the IRS issued Revenue Ruling 2006-57. This guidance relates only to debit card use for transit passes and does not address parking or vanpooling. The Revenue Ruling becomes effective on January 1, 2008, but can be relied upon currently. In the Revenue Ruling, the IRS addressed four situations where electronic transactions might occur, allowing three to work on a pre-tax basis and disallowing the fourth for pre-tax purposes.

Situation 1 (Smartcards). If an employer makes monthly reimbursement payments to a transit system, up to the allowable monthly maximum ($110 in 2007), the transit system can provide to employees so-called “smartcards.” A smartcard is simply a plastic card containing a memory chip that stores the card’s serial number and the value of the fare media stored on the card. The smartcard has one restriction: only fare media can be purchased with it.

This is good news. Smartcards are considered vouchers. Thus, this option is available with no substantiation requirements and regardless of whether vouchers are readily available in the metropolitan area.

Example : Metro of Harris County, Texas, has an Online RideStore where only fare media may be purchased. A Houston employer works directly with Metro to purchase smartcards on a pre-tax basis, up to $110 per month in 2007. Participants do not have to substantiate any of the expenses.

Situation 2 (Debit cards restricted to merchant terminals). An employer uses a debit card provider, whose debit card works only at merchant terminals where only fare media can be sold. The employer makes monthly payments to the debit card provider, which loads each employee’s card appropriately. This is more good news. Terminal-restricted debit cards are also considered vouchers, and there is no substantiation requirement.

Example : An Illinois employer contracts with card Company A to provide transportation debit cards that are usable only at Chicago Transit Authority (bus/rail). Each participant’s card is loaded with the monthly amount that was elected. Participants do not have to substantiate any of the expenses.

Situation 3 (Debit cards restricted to merchant category codes [MCCs] with payments in arrears). This time, the employer’s debit card is available for transactions at any merchant with an MCC for transportation in a metropolitan area where vouchers or similar items are not readily available for purchase by the employer and direct distribution to employees. The available MCC merchants include:

• Local and suburban commuter passenger transport.
• Passenger railway.
• Bus lines, excluding charters and tours.
• Transportation service (not elsewhere classified).

There are obligations on participants:

• They certify at the outset and each year that card use will be limited to eligible transportation expenses.
• In the first month, they pay for eligible expenses with after-tax dollars and provide substantiation of the expenses.
• Approval is automatic for recurring expenses that:
• Are equal to or less than the first month’s amount; and
• Match that amount in terms of time period and merchant.
• Participants provide substantiation of non-matching expenses, i.e., expenses that differ in terms of time period, merchant or that are greater than the prior amount.

There are difficulties with this option. First, many employers and participants will likely view the first month process as cumbersome and complicated. Second, this option is available only in areas where vouchers are not readily available (e.g., New York City) as that term is defined in the 2001 Transportation Regulations. Vouchers are readily available in most metropolitan areas.

Situation 4 (Debit Cards restricted to MCCs without payments in arrears). The facts are similar to Situation 3, except for the following:

• The debit cards are available for use in the first month, not after the first month as with Situation 3.
• Even though participants make an initial certification, there are no annual certifications because of a certification statement on the back of the card.
• There are no substantiation requirements.

The IRS stated that this situation was not a “bona fide reimbursement arrangement” because it provides for advances rather than reimbursements and because it relies solely on employee certifications instead of substantiation.

More Guidance Needed. Several things remain unclear after the issuance of this guidance. First, the Revenue Ruling did not address whether a debit card can be used to reimburse parking, which carries a separate monthly limit ($215 in 2007). Second, the guidance does not address MCC-restricted debit card usage in areas where vouchers are readily available. Presumably, because such debit card usage is considered cash reimbursement, these cards cannot be used in those areas. Third, the IRS did not address whether a single card – loaded also for Health FSA, HRA and/or HSA accounts – could also be used for Transportation Plans. The IRS’ use of the phrases “terminal-restricted debit card” and “MCC-restricted debit card” would suggest a prohibition against a so-called “stacked” card. Finally, it is unclear how non-compliant debit card programs should proceed between now and January 1, 2008.

The Revenue Ruling indicates that IRS officials “will continue to review this issue.” In other words, expect more speed limit signs in the near future, hopefully before this time next year. A copy of the Revenue Ruling is available at: www.irs.gov/pub/irs-irbs/irb06-47.pdf.

###

News & Review sign-up sheet | Archive