What to do with Unused Commuter Benefits Funds

June 30, 2022

With changes to workplace arrangements and working conditions following the COVID pandemic, employers are seeking ways to allow their employees to use already contributed commuter benefits funds, and to differentiate their welfare benefits package.  Questions surround the use of dollars allocated for 2021 plan years, and what to do for 2022 and 2023 with many unknowns about the future.

At the time of this writing, the IRS has issued no further guidance on commuter benefits except through formal inquiry related to specific consumer letters. Many employers and their participants are left to wonder how to use remaining funds, and there are open questions surrounding whether to elect or make contributions in an environment with so much uncertainty.

Here’s what we know: The IRS has released an information letter responding to an inquiry from a qualified transportation plan participant whose employer decided to let him work from home permanently due to the COVID-19 pandemic. To avoid losing compensation reduction amounts he had previously set aside for parking, the participant asked whether his unused compensation reductions could be transferred to a health FSA under a cafeteria plan.

The answer: The code does not allow cafeteria plans to offer qualified transportation fringe benefits or permit unused compensation reduction amounts under a qualified transportation plan to be transferred to a health FSA under a cafeteria plan. Neither are cash refunds permitted, even to employees whose compensation reduction amounts exceed their need for qualified transportation fringe benefits.

Employees may be uncertain regarding their transportation needs for the upcoming plan year, however the response letter from the IRS explained there are two ways that they can be offered flexibility:

• Unused compensation reduction amounts under an employer’s qualified transportation plan can be carried over to subsequent periods under the plan and used for future commuting expenses, so long as the employee does not receive benefits that exceed the maximum excludable amount in any one month.
• One qualified transportation benefit (e.g., parking) can even be used for a different transportation benefit (e.g., transit) if the plan permits and the maximum monthly benefit is not exceeded.

The qualified transportation rules have proven sufficiently flexible to handle most situations resulting from the COVID-19 emergency. Most employers permit benefit election changes at least monthly, and plans can allow current participants to carry over unused balances indefinitely. But those options are not always sufficient. Because some risk of loss due to changing circumstances is unavoidable, employers should clearly articulate that risk to employees before they make compensation reduction elections.

In summary, for people who have a commuter benefit plan and would like to use funds at some point in the future, the industry is awaiting further guidance and pending legislation to further extend the temporary extensions or allow carry over of funds to avoid the use-it-or-lose-it scenario.