Section 132.—Certain Fringe Benefits

26 CFR 1.132–9(b): Qualified transportation fringes.

Parking reimbursements. This ruling holds that certain amounts paid to an employee as “reimbursements” for a parking expense that the employee supposedly “paid” through a salary reduction are wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the collection of income tax at source on wages (federal income tax withholding).

Rev. Rul. 2004–98

ISSUE(S)

Whether, under the facts described below, the exclusion from gross income under § 132(a)(5) applies to payments from an employer to employees characterized as “reimbursements” by the employer.

FACTS

Employer X decides to provide parking for its employees. The parking will be on or near X’s business premises.

Before X implements the arrangement for parking, as described below, X pays Employee A monthly wages of $1,500. After withholding for employee FICA tax of $114.75 and withholding for federal income tax of $83.80, A’s net pay is $1,301.45.

Monthly wages $1,500.00 FICA tax withholding (114.75) Federal income tax (83.80)

withholding

Net monthly payment $1,301.45

X implements a payroll arrangement under which the amount of its employees’ cash compensation is reduced in return for X providing parking. In addition, X makes “reimbursement” payments to employees with respect to parking expenses in amounts that cause employees’ net after-tax pay from X to be the same amount as it would have been if there was no compensation reduction. X takes the position that both the compensation reduction amounts and the “reimbursement” payments are excluded from gross income of employees and are not subject to Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, or federal income tax withholding.

X can make the compensation reduction used to pay for parking under X’s payroll arrangement mandatory or elective. For example, X could unilaterally reduce all employees’ salaries and provide parking to all employees. Alternatively, X could offer employees the choice, as permitted under section 132(f)(4), between cash compensation and parking, and provide parking to the employees electing to reduce their cash compensation.

After X implements the arrangement, Employee A’s monthly wages of $1,500 are reduced by $100 in exchange for the parking. From the remaining $1,400, X withholds employee FICA tax of $105 and federal income tax of $73.30. X then pays A an additional $79.75 as a purported reimbursement of parking expenses, with the result that A’s net pay remains at $1,301.45.

Monthly wages $1,400.00 FICA tax withholding (105.00) Federal income tax (73.30)

withholding

Subtotal $1,221.70

Additional payment 79.75 Net monthly payment $1,301.45

LAW AND ANALYSIS

Section 132(a)(5) provides that any employer-provided fringe benefit that qualifies as a “qualified transportation fringe” is excluded from gross income. Section 132(f)(1) provides that the term “qualified transportation fringe” means (1) transportation between home and work in a commuter highway vehicle, (2) any transit pass, and (3) qualified parking. Under § 132(f)(5)(C), the term “qualified parking” means parking provided by an employer to an employee on or near the employer’s business premises.

Section 132(f)(4) provides that no amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe and compensation that would otherwise be includible in the gross income of such employee.

Section 132(f)(3) provides that a qualified transportation fringe includes a cash reimbursement by an employer to an employee for qualified parking expenses. Section 1.132–9(b) Q/A–16(a) of the regulations provides that a reimbursement must be made under a bona fide reimbursement arrangement within the meaning of § 1.132–9(b) Q/A–16(c) in order to be excluded from gross income. Section 1.132–9(b) Q&A–16(c) provides that employers that make cash reimbursements must establish a bona fide reimbursement arrangement to establish that their employees have, in fact, incurred expenses for qualified parking. The employer must implement reasonable procedures to ensure that an amount equal to the reimbursement was incurred by the employee for qualified parking.

Sections 3121(a) and 3306(b) define the term “wages” for FICA and FUTA purposes, respectively, as all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash, with certain specified exceptions. Section 3401(a) contains a similar definition for purposes of federal income tax withholding. Sections 3121(a)(20), 3306(b)(16), and 3401(a)(19) provide for purposes of FICA, FUTA, and federal income tax with

2004–42 I.R.B. 664 October 18, 2004

incidental expenses, or for meal and incidental expenses, incurred while traveling away from home that most nearly represents current costs. See Rev. Proc. 2004-60, page 682.