Is Metro misinterpreting IRS rules on SmartBenefits?

Metro officials will be answering tough questions about the upcoming SmartBenefits change at tonight’s Riders’ Advisory Council meeting and tomorrow’s Board meeting.

Last week, they announced that beginning January 1st, SmartTrip will contain three “bins”: one for fare money you put on the card directly from a machine, and one each for transit and parking money that comes from an employer SmartBenefits program.

That makes sense. But what doesn’t make sense is the additional provision that at the end of each month, any unused money in the two SmartBenefits bins will go back to the employer. Many employees currently carry a small amount over from one month to the next. Most employers require employees to make changes to SmartBenefits weeks in advance, so if an employee ends up taking a vacation or working from home more at the end of a month, it’s too late to reduce the SmartBenefits allocation for the following month, let alone for the current one. That’s not a problem today, but it any unused benefits go back to the employer, it could become a huge problem.

It will also create a burden for employers. Where the employer pays for the transit benefits itself, as the federal government does, it can just take the money back. But employers that deduct pre-tax money from employees’ paychecks will now have to manage the returned money and ensure it gets back to the employee.

Why do this? Metro says that this is an IRS requirement, but many observers aren’t so sure. According to a comment on Get There, Metro may be misinterpreting the IRS rules:

Documentation I’ve read states that the Qualified Transportation Fringe Benefit is NOT a cafeteria plan and NOT subject to a “use it or lose it” rule. IRS documentation states that unused monies can in fact be carried over from month to month:

http://www.irs.gov/pub/irs-irbs/irb06-47.pdf

http://www.irs.ustreas.gov/pub/irs-tege/fringe_benefit_fslg.pdf

http://www.irs.gov/pub/irs-wd/02-0003.pdf states, “Treasury Regulation section 1.132-9, Q/A-15 provides that an employee may carry over unused compensation reduction amounts to subsequent periods pursuant to the employer’s compensation reduction arrangement.”

This is placing a real burden on people who process payroll. While an employer has the flexibility to design a plan the way they want, the question comes down to whether or not we are REQUIRED to refund unused benefits. I attended the October 20th SmartBenefits seminar and can tell you that there were very heated discussions regarding this new provision.

Page 21 of the second IRS publication in the comment says,

[A pretax] election may not be revoked after the employee is currently able to receive the cash or after the beginning the period for which the ATF is to be provided. Any unused QTF may not be refunded. However, the unused portion may be carried over to subsequent periods and used to provide QTFs as long as the amount expended does not exceed annual limits.

Metro typically releases their presentations for RAC meetings and Board meetings by the previous Friday, and did so for all other agenda items for this week. But there is still no word on SmarTrip. Perhaps Metro has already fixed this problem in response to the pushback they’ve received.

Curiously, the Board agenda for tomorrow also includes a mysterious item about amending the Public Access to Records Policy (PARP) in executive session. If Metro is considering an amendment to their policy about opening up information to the public, they should solicit some public input on that amendment, or at the very least reveal their plans before making any decisions.