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IRC 132(f)

A few years ago Congress passed a law allowing employers to provide tax-free fringe benefits to their employees for parking and public-transit expenses involved in commuting to work. They started with a limit of $100/month for public transit and $200 or so for parking, both to be indexed automatically to inflation; for 2007, it's up to $110/month for public transit.

Rant 1: How come you can tax-shelter more money for parking than for public transit? If somebody is trying to decide between driving to work (where they have to pay for parking) and taking public transit, this tilts the decision in favor of driving over public transit -- the last thing America needs. On environmental grounds, I would rather the whole program were scrapped than that it favor parking over public transit.

Rant 2:
However, since it does exist, and I do routinely take public transit to work, I decided to join the system and save a few hundred bucks a year.
The law can be implemented in a number of ways, and the company that does our payroll has decided to create "flexible transit spending accounts": you agree to have a certain amount withheld from your paycheck every month, it goes into the account, then you submit receipts for parking and/or public transit and they reimburse you from the account.

I spend about $175/month commuting to campus in months that classes are in session, and about $40/month in the other months -- at any rate, a total easily over $1320/year, so I elected to withhold the maximum allowable amount, submitting receipts for whatever I actually spent each month.

After a few months I got a printed statement in the mail showing the contributions, claims, and payments to date. It was confusingly organized, and I had some trouble figuring out which payment went with which claim. It looked as though some of the claims weren't being paid in full, presumably because I hadn't yet contributed enough to the account to cover them. Ditto with the next statement or two.

Eventually I realized that most of my claims weren't being paid in full, and that money was piling up in the account every summer. I wrote to the payroll company to ask when they were going to pay these claims, since there was now more than enough money in the account to cover them, and I got a series of uninformative and, apparently, patently untrue answers. After a dozen or more e-mail exchanges (made more difficult by the company's refusal to accept ordinary e-mail, but only messages sent by filling out a Web form that has about a 30-character-wide text box), it became clear that they were only reimbursing $110 worth of expenses in any given month, even if I had spent $175 and there was plenty in the account. In other words, they were applying the $100/month limit both to how much money went into the account, and also to how much money could come out of the account. They claimed this was required by IRS regulations. I looked up the relevant regulation (IRC 132(f)) on the Web, and it didn't say anything about reimbursement, only about "fringe benefits", which it seemed to me were obviously the pre-tax money going into the account.

By this time I had about $1000 in piled-up balance, and about $700 in unpaid claims, with no prospect of the balance ever decreasing because the most I could possibly get reimbursed was equal to what I was putting in every month. An "account" whose balance never decreases, but only ratchets up, didn't make sense; that couldn't be right, could it? And if my transit expenses were equally distributed throughout the year, I could tax-shelter $1320/year; if I spend the same amount unequally distributed, I could tax-shelter considerably less, and that couldn't be right either, could it?

I couldn't get an answer from the payroll company that suggested that they even understood my question, nor could I get any answer from my employer's payroll department. So I tried the IRS web site, looking for more detailed interpretations of the regulation in question. I found several, with nice user-friendly illustrative examples, but none addressing this particular issue, as though nobody had ever faced this problem before.

So I started looking for an e-mail link or form. The only one I found was under "FAQ about the web site", but I decided to try it. I got back an e-mail, about a day later, saying "We can't answer individual tax questions; try one of these phone numbers." I would have preferred e-mail, but I called the phone number, got transferred, transferred again, and transferred again, and finally found somebody who dealt with fringe-benefit rules, who said he wasn't trained or authorized to answer this sort of question; try e-mailing the IRS. Which I had already done, but he very helpfully led me through the Web site to the correct form for asking tax-law questions. (Click "Site Map" at the top right, then scroll down a page or two, find "Help" near the bottom right of the next page, click "Help with tax questions", and scroll down a page or two.)

About a day later, I got a fairly detailed reply. Part of it wasn't relevant to me, quoting regulations that say I can't get reimbursement from the account for things other than transit or that I can't get a refund for unused balance after I quit the system, neither of which I was trying to do, but it did say clearly "Your payroll company's interpretation is correct" and "Yes, it means you get less tax benefit; your only option seems to be reducing your withholding." Not the answer I was hoping for, but I'll give the IRS credit for being prompt and reasonably clear.

I have accordingly reduced my monthly withholding to $5 (I can't reduce it to $0, because that takes me out of the system so I'll never see that $1000), and I should have all the money back within a year. The time I've spent trying to straighten this out is probably equal to the several hundred dollars a year I was hoping to save on taxes....