IRS Expands on Qualified Transportation Fringe Benefits

November 27, 2006 ( - The Internal Revenue Service (IRS) has issued Revenue Ruling 2006-57, announcing that smart cards and terminal-restricted debit cards are qualified transportation fringe benefits and, as such, are exempt from income tax.

The Internal Revenue Code dictates there are no employee substantiation requirements if an employer distributes a transit pass, including a voucher or similar item to employees. The code also says an employer reimbursement is a qualified transportation fringe benefit if no voucher or similar item is available to the employee in exchange for a transit pass.

The new ruling provides that smart cards and terminal-restricted debit cards are considered vouchers since amounts credited to the cards are only allowed to be used for transportation fares. Amounts applied to these cards within the code’s limits are excludable from gross income, and since the cards can only be used for transportation fares, no employee substantiation for charges on the card is required.

The ruling also addresses the use of merchant category code (MCC)-restricted debit cards as a transportation fringe benefit. The IRS determined that these debit cards may be used as a qualified transportation fringe, but only where another voucher is not readily available. Also, the card agreement must qualify as a “bona fide reimbursement arrangement,” making employee substantiation of charges to the card necessary.

Details of the ruling can be viewed here .