Question: Can an employer provide employees with a cash refund of their unused transportation benefits after the end of the plan year?
Answer: Unfortunately, no. There are limited ways in which unused transportation benefits may be used. When an employee makes pre-tax payroll deductions for an employer-provided transportation benefit, the funds may only be disbursed to the employee for reimbursement of qualified transportation expenses under Sections 132(a)(5) and 132(f) of the Internal Revenue Code.
In IRS Information Letter 2012-0027 (December 30, 2021), the IRS provided the following guidance on what employees and employers could and could not do with unused transportation benefits. The letter states that an employee cannot “cash out” unused transportation benefits. The IRS made clear that once an employee has agreed to reduce their compensation on a pre-tax basis to pay for qualified transportation fringe benefits, the employee cannot receive that compensation as a “cash refund” at any point. Instead, the employee is only entitled to receive nontaxable qualified transportation fringe benefits.
Despite the no-cash-out rule, employees do have some flexibility when it comes to when they can use the transportation benefits. The IRS Information letter states that there is no “use-it-or-lose-it” rule for transportation benefits. The IRS allows employees to carry over unused benefits from month to month. Other IRS guidance has provided that transportation benefits may carry over to future plan years and never expire while an employee remains actively employed. (Treasury Regulation 1.132-9(b), Q&A 15; IRS Information Letter 2024-0004.)