De Minimis Fringe Rules

There are two employer provided transportation fare rules contained in the de minimis fringe benefit regulations under IRC Sec. 132(e) of the code. The first de minimis fringe benefit rules, set forth in Reg. Sec. 1.132-6(d)(2)(i), provides that the cost of local transportation fare is totally excludable from an employees gross income, regardless of gross income, as a de minimis fringe benefit, as long as the benefit is considered reasonable and is provided to the employee on an occasional basis. An example of an occasional basis would be an employee working overtime that would extend normal working hours.

The second de minimis fringe benefit rules contained in Reg. Sec. 1.132- 6(d)(2)(iii), only provides for a partial exclusion from gross income for local transportation that is provided to the employee for commuting to and from work because of unusual circumstances. This exclusion is only available to those "noncontrol" employees who are provided local transportation because it is considered unsafe to use other available local transportation. The definition of "control" employees (for 1991), contained under Reg. Sec. 1.61-21(f)(5), includes all officers, directors, 1% owners, or any employees earning $121,070 or more. Reg. Sec. 1.61-21(f)(6) defines a government "control" employee to include any elected official or any government employee earning $101,300 or more. The determination of whether unusual circumstances exist is based on facts and circumstances. A factor in considering if an area is defined as unsafe is the history of crime in the area of the employees residence or work place and if a reasonable person would consider the area unsafe during the time of day that the employee must commute.

For noncontrol employees, if unusual circumstances and unsafe conditions exist, the value in excess of $1.50 for each one-way commute provided by the employer to the employee between work and home is excludable from the employees gross income.

Effective Date. The de minimis fringe benefit rules described above apply as of July 1, 1991.

Special Valuation Rule

The special valuation rule of Reg. Sec. 1.61-21(K) provides an exclusion from gross income for local transportation fare to qualified employees without an overtime or unusual circumstance requirement. This special valuation rule applies only to "nonexempt" employees that are subject to the Fair Labor Standards Act of 1938 (as amended), 29 U.S.C. Secs. 210- 219 (FLSA), that earn less than $60,535 in 1991 and who receive local transportation to or from work because of security reasons. If the above requirements are met, the special valuation rules apply, and the value in excess of $1.50 for each one-way commute provided by the employer to the employee between work and home in excludable from the employees gross income.

The purpose of the new rule is to assist lower-paid non-professionals who would ordinarily walk or use public transportation when commuting, but are unable to do so because of unsafe conditions when they must commute. Therefore, the rule has not been expanded to cover employees who have other modes of transportation available to them.

Employer provided transportation includes cash reimbursements to an employee to cover the cost of purchasing transportation from an unrelated third party provided, the reimbursement is made under a bona fide reimbursement arrangement. It is also includes transportation provided by the employer pursuant to an agreement with an independent taxi or car service company.

A qualified employer under Reg. Sec. 1.61-21(k)(6) is defined as an employee who is paid on an hourly basis. The final regulations provide that if an employee's compensation is stated on an annual basis, the employee may nonetheless be treated as "paid on an hourly basis" as long as the employee is not claimed to be exempt from the minimum wage and maximum hour provisions of the FLSA and is paid overtime wages either equal to or exceeding one-and-a-half times the employee's regular hourly rate of pay.

Effective Date. The special valuation rules apply as of July 31, 1991.

Public Transit Passes

The final regulations made a cost-of-living adjustment to the amount that may be excluded as a de minimis fringe for reimbursements an employee receives for public transit commuting expenses. Under Sec. 132(s), reimbursements made by an employer to cover the cost of commuting on a public transit system are excludable from an employee's gross income as de minimis fringe, provided the employees do not receive more than $21 per month ($15 for months prior July 1, 1992, and after December 31, 1988). This exclusion applies to tokens, fare cards, vouchers or other similar instruments that enable an employee to use the public transportation system. The reimbursement must be made to the employee under a bona fide reimbursement arrangement. The employer need not substantiate each employee commuting expense but must establish appropriate procedures to periodically verify that the employee's use of the public transportation is consistent with the value of the benefit provided by the employer.