Comments Concerning Proposed Regulation on Qualified Transportation
Fringe Benefits under Internal Revenue Code Section 132(F)

VI.  Transportation Fringe Benefits Impact on Retirement Benefits

The Proposed Regulation does not provide the guidance needed as to whether a qualified transportation fringe benefit falls under the safe harbor definitions of compensation for qualified plans. In addition, section 132(f) salary reduction contributions may presently be interpreted as reducing the employee’s compensation for purposes of the section 415 limit. The issue stems from the present wording of section 415(c)(3), which does not cross-reference section 132(f), unlike the inclusion in section 415(c)(3)(D) of the rule providing that salary reduction contributions under sections 401(k), 403(b), or 125 plans are to be added back to compensation under section 415(c). The lack of cross-referencing also affects the definition of highly compensated employee within section 414(q) and the nondiscrimination testing of compensation under section 414(s). Thus, as a result of any salary reduction for transportation fringe benefits, the amount of an employee’s compensation will be correspondingly decreased for purposes of calculating retirement benefits or, at a minimum, for testing compliance with respect to such benefits.

Congress did not intend this outcome. The Joint Committee’s General Explanation of Tax Legislation Enacted in 1998 provides direct guidance that salary reduction amounts used to provide transportation fringe benefits should be treated for pension purposes in the same manner as other salary reduction contributions. Specifically, the Committee, stated

"it is intended that such amounts be included for purposes of applying the limits on contributions and benefits [sections 415 and 401(a)(17)], and that an employer may elect whether or not to include such amounts in compensation for nondiscrimination testing…It is expected that the Secretary, prescribing rules regarding the alternative definition of compensation, will treat salary reduction amounts under this provision the same as other salary reduction contributions." (emphasis added)

Moreover, legislation has been introduced into Congress (H.R. 1102, § 515 ) and (S. 741 § 609) whereby section 415(c)(3)(D) adds back to "compensation" salary reduction amounts used for qualified transportation fringe benefits under section 132(f). Passage of these bills will satisfy Congress’s intent to treat salary reduction transportation fringe benefits in the same fashion as salary reduction contributions to plans established under sections 401(k), 403(b), and 125.

Nonetheless, based on the legislative history to section 132(f) cited above, we believe that Treasury has the authority to issue regulations including compensation reductions under section 132(f) as compensation for purposes of section 415 even absent enactment of a change in section 415 by Congress. Consequently, we respectfully recommend that the final regulation make the following changes regarding the interplay between sections 132(f) and 415:

1. The IRS and Treasury should revise the definition of compensation under Treas. Reg. § 1.415-2(d) to exclude salary reduction contributions section 132(f).
    
2. These changes should be effective retroactively.