- Annual Testing
In determining whether a transit voucher is "readily
available" the employer must calculate whether the administrative costs of obtaining
a voucher are "significant." Under Q/A-16, the "costs are treated as
significant if the average monthly administrative costs incurred by the employer
for a voucher…are more than 1 percent of the average monthly value of the
vouchers for a system." (emphasis added) Moreover, under Q/A-9, the value of
qualified transportation fringes is calculated on a monthly basis. Although the
Proposed Regulation does not explicitly state when an employer is required to test for
purposes of satisfying the "readily available" standard, it can be read as
implying that testing should be conducted on a monthly basis, and we assume that is what
was intended. In addition, the test speaks in terms of the monthly administrative charge
actually "incurred" by the employer. See also the language in Q/A-16, which
provides that costs are significant if the average monthly cost "incurred" by
the employer in providing vouchers exceeds the safe harbor amount.
We believe the Proposed Regulation’s inference that monthly testing is required
based upon costs incurred is unworkable for two reasons. First, an employer that did not
provide vouchers for a particular month based upon estimated employee transit pass usage
and published transit pass rates in an area might well find itself in violation of the
rule if its estimates proved to be incorrect or if the transit voucher vendor modified its
rate schedule mid-month or at any time after the vendor’s required pre-purchase date.
In such a case, are employees to be taxed retroactively on the amount of elective
deferrals or reimbursements received during that month? No employer, large or small, would
relish explaining to its workforce why benefits that had been communicated as being
tax-free have become retroactively taxable for a given month.
Second, the test speaks in terms of costs "incurred." If an employer believes
that it is exempt from providing vouchers in a given area pursuant to the safe harbor, no
additional costs are incurred. We do not believe that it was Treasury’s intent to
require all employers to shift month to month from a reimbursement to a voucher program
because the employer literally cannot meet the "costs incurred" test. Thus, we
would recommend that the rule require that the employer take into account the costs that
"would have been incurred had a voucher program been in place."
Once the test is clarified in this manner, however, it becomes apparent that every
employer implementing a qualified transportation program that provides for mass transit
benefits must have administrative personnel (e.g., a compliance officer) to monitor
daily changes in the costs of mass transit vouchers (since the test is based on the average
monthly costs) and calculate how that average cost compares to daily changes in employee
elections for a month (i.e., varying charges may be imposed for different
denominations). The cost of administering such monthly tests is an excessive burden on
employers of any size.
We believe that Treasury could simplify the testing in a manner that would not
undermine the statutory intent, while simultaneously making the program more attractive to
employers by alleviating excessive administrative burdens. Instead of monthly testing, we
recommend that the final regulation be revised to state that the employer may test the
"average monthly cost" associated with the voucher system on a yearly basis. A
rule similar to "snapshot testing" in the qualified plan area would
significantly enhance the viability of the program. Additionally, it may be prudent to
require testing as the initial step of establishing a qualified transit program and again
only in years, and with respect to locations, in which the fare media providers change
their fees, there are significant changes in the employer’s demographics, or there
are other similar changes in circumstances indicating a need for a new test. Thus, the
employer will know if the vouchers are "readily available" before placing
valuable resources into the development of a distribution system for transit passes.
Moreover, after the program has been implemented, the employer will be able to devote
fewer resources yearly to testing. Employers will be better able to predict the costs of
establishing and maintaining a qualified transportation program and in turn will be more
likely to implement and/or continue this valuable employee benefit. We believe that the
above recommendations reflect a more workable standard for the testing period and,
therefore, request that the final regulation include these clarifications.