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Benefits

IRS Letter Addresses Effect of Involuntary Termination on Unused Transportation Benefits

EBIA  

EBIA  

IRS Information Letter 2019-0002 (Mar. 11, 2019)

Available at https://www.irs.gov/pub/irs-wd/19-0002.pdf

The IRS has released an information letter explaining that amounts contributed to a qualified transportation fringe benefit plan cannot be refunded or used for post-termination expenses following an involuntary termination of employment. The letter responds to an inquiry on behalf of an individual who had accumulated nearly $400 of unused compensation reduction contributions to her employer’s qualified transportation fringe benefit plan when she was fired. The letter explains that qualified transportation plans can only provide benefits to current employees. Thus, employers cannot provide these benefits to former employees, regardless of whether the benefits were additions to regular compensation or funded by compensation reductions. Similarly, unused compensation reduction amounts cannot be refunded to former employees, even if termination was involuntary.

EBIA Comment: Compensation reduction elections under qualified transportation fringe benefit plans can typically be changed monthly to correspond with monthly eligible expenses such as transit passes and parking. Ordinarily, employees can limit the build-up of funds in their plan accounts and minimize the risk of losing compensation reductions if they are unexpectedly terminated. But sometimes, employment termination catches an employee with a meaningful unused balance. Plans can be designed to reimburse eligible pre-termination expenses from an employee’s unused balance, even if the reimbursement request is made after termination. But if an employee has no such expenses, or they are insufficient to exhaust the employee’s balance, the remainder must be forfeited. To ensure that employees are aware of this risk, employers’ compensation reduction agreements and plan summaries should include a warning about the possibility of forfeiture. For more information, see EBIA’s Fringe Benefits manual at Sections XX.O (“Compensation Reduction Elections”) and XX.P (“Carryovers Allowed for Current Participants; Former Participants Cannot Have Unused Amounts Refunded”).

Contributing Editors: EBIA Staff.

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