IRS Reconsiders Rules on Use of Smart Cards for Transit

Wednesday, May 30, 2012 Print Email

The Internal Revenue Service is asking for public comments on whether it needs to change its guidance on the use of smart cards, debit cards, credit cards and other electronic media to provide pretax transportation fringe benefits. Notice 2012-38 solicits public comments on what additional guidance may be needed after Rev. Rul. 2006-57, which provides guidance on the use of such cards and electronic media to provide qualified transportation fringes under Sections 132(a)(5) and (f) of the Tax Code, became effective on Jan. 1, 2012. The notice requests public comments on a number of issues surrounding an employer's provision of transit benefits in light of changes in technology in transit benefit administration. Section 132(f)(3) of the Code generally allows employers to use cash reimbursement arrangements to provide employees with qualified transportation fringe benefits. 

This section, however, prohibits use of such arrangements to provide transit benefits “if a voucher or similar item which may be exchanged only for a transit pass” is “readily available.” A voucher or similar item is not readily available if the entity providing it imposes restrictions that effectively prevent the employer from obtaining vouchers appropriate for distribution to employees. The Treasury Department and the IRS said they have become aware that changes in fare media and in transit benefit administration may have created the need for guidance in addition to the guidance issued concerning the specific situations described in Rev. Rul. 2006-57. Developments in technology, an increase in the number of transit systems and third parties providing electronic media for transit use, and the trend away from use of paper fare media provide a basis for concluding that the four situations described in Rev. Rul. 2006-57 may not cover the full range of available electronic media for providing fare media.

The Treasury and the IRS are requesting comments on how electronic media may meet the statutory requirements under Section 132(f) for providing transit benefits, either as vouchers or transit passes or through bona fide cash reimbursement arrangements in a manner other than those described in situations one through four in Rev. Rul. 2006-57.

The Treasury and the IRS are also requesting comments on the availability of terminal-restricted cards and any other electronic media qualifying as vouchers or transit passes for the purposes of determining whether such items are readily available and, therefore, cash reimbursement arrangements for providing transit benefits should be prohibited.

Finally, the Treasury and the IRS request comments on the challenges that employers encounter in transitioning from paper transit passes or vouchers to electronic media that qualify as vouchers or transit passes, or from cash reimbursement arrangements to electronic media qualifying as transit passes or vouchers.

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