A private company that provides paper transit vouchers to parts of the federal government for use in its qualified transportation fringe benefits has claimed that the U.S. Department of Transportation is implementing an electronic payment system that does not comply with IRS guidelines in a program that is intended to replace paper transit fare vouchers used by the federal government — the nation’s largest employer. The move could affect how debit cards are used in conjunction with QTFBs by all employers.
IRS guidelines require that debit cards used with QTFBs have reasonable safeguards against misuse. For example, a cardholder who enjoys tax-free commuter benefits under QTFBs should not be able to swipe a QTFB debit card at a store to purchase goods and services that do not qualify for tax-free treatment; that is, anything that is not transit fare in this case. “These guidelines are comparable to treatment of cash equivalents for de minimis fringe benefits,” said Washington, D.C. tax attorney and Guide Contributing Editor David Fuller. “Cash or, say, gift cards that can be used virtually at any store to buy anything, do nothing to ensure the recipient uses the funds only for the intended purpose of the benefit, be it a wellness benefit, a holiday turkey or something else. That is why the IRS does not allow just any type of debit card to be used along with a QTFB. It needs to have the nececessary limitations that would prevent the cardholder from using the funds for their own personal purposes.”
But the DOT maintains that the card system it is using complies with IRS guidelines and the tax laws. The agency administers a transit benefit distribution program called TRANServe for 250,000 federal government employees across more than 100 agencies. The DOT does not provide dollar amounts of benefits provided, but based on the federally set dollar caps for QTFBs in 2012, if all 250,000 participants had elected the maximum monthly allowance for tax-free mass transit costs under the stated cap for 2012, the annual total — in either employer-provided funds or amounts deducted from the employee’s own paycheck, depending on the plan — would be $375 million. The 2012 cap was $125 per month until Congress retroactively increased it to $240 in January 2013. This year, the limit is $245 per month, bringing the potential amount involved to $720 million. A QTFB program can provide such benefits without including the benefits’ value in employees’ taxable income as long as the plan follows IRS guidelines under Code Section 132(f). Those guidelines can be very technical, and in the case of QTFBs, they specify what type of debit card (more later) is acceptable in a QTFB plan.
In a comment filed with the IRS, the company that provides paper vouchers, Daniel Island, S.C.-based TranBen, asserted that “where [the TRANServe] commuter benefits have already been distributed in 2012 in the National Capital Region and beyond, such employees may unwittingly be liable for additional income taxes.” The comments — filed in response to IRS Notice 2012-38 (more on that later) — attracted the attention of Congress, which has questioned the IRS commissioner about the agency’s position on the use of debit cards in QTFBs specifically in the context of TRANServe.
TranBen Director of Operations Tim Swafford said in an e-mail on Dec. 12, “Prior to 2012, a few administrators in the DOT worked under the radar to establish the DOT debit card program and are now operating it way ahead of the IRS changing its rulings that disallow DOT’s type of debit cards. We believe TRANServe is attempting to jam the implementation through in order to make it seem more difficult to reverse course.”
But a DOT spokesperson pointed out that the agency has alerted the public about the debit cards through the normal federal rulemaking process, starting with a notice in the March 29, 2011 Federal Register.
The DOT also asserted that paper vouchers have their own vulnerabilities to fraud and misuse. It said in a Sept. 7, 2012 letter responding to TranBen’s comments, “Paper vouchers that must be distributed nation-wide by hand, while being inventoried and stored for extended periods of time, present vulnerabilities for fraud and abuse that will be reduced through the introduction of the DOT debit card.” The letter cited a 2007 report from the Government Accountability Office about fraud and abuse of paper transit vouchers by federal employees.