Annual TestingIn 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.
