Reimbursement of parking expenses.

E provided parking to its employees and reduced employee cash compensation in exchange. Then, E reimbursed such employees for parking expenses in an amount that caused the employees' net after-tax pay to be the same as it was before the reduction for parking costs. E contends that both the compensation reduction amounts and reimbursement payments are excludible from FUTA, FICA and income tax withholding.

Law

A qualified transportation fringe is excluded from gross income under Sec. 132(a)(5). For purposes of FICA, FUTA and Federal income tax withholding, "wages" do not include any benefit provided to, or on behalf of, an employee if it is reasonable to believe that the employee will be able to exclude such benefit from income under Sec. 132.

A qualified transportation fringe includes parking provided by an employer to an employee on or near the employer's business premises, under Sec. 132(f)(5)(C), as well as a cash reimbursement by an employer to an employee for qualified parking expenses, under Sec. 132(f)(3). However, employers that make cash reimbursements must prove a bona fide reimbursement arrangement to establish that their employees have, in fact, incurred expenses for qualified parking (Regs. Sec. 1.132-9(b), Q&A-16(c)).

Thus, an employee may exclude from gross income employer reimbursements for qualified parking expenses, but only if he or she actually incurred them. If an employee is given a choice between cash compensation or an employer-provided benefit under a statutory exception to the constructive receipt rules, such as Sec. 132(f)(4), or if an employer unilaterally reduces cash compensation for the purpose of providing a nontaxable benefit, the benefit is treated as provided directly by the employer, rather than purchased by the employee with the amount of the compensation reduction. Otherwise, the value of the benefits would not be excluded from the employee's gross income.

Conclusion

The cost of providing the parking was incurred by E and the benefit's value is excludible from the employees' gross income, under Sec. 132(a)(5). However, the reimbursements E makes to employees are not excluded from gross income under Sec. 132(a)(5), because there is no other expense incurred by the employees for E to reimburse. The conclusion would be the same whether the compensation reduction was mandatory or elective. It would also be the same if the employer originally provided free parking to employees and then purported to impose a charge on employees for parking; see Rev. Rul. 2002-3, which holds that a purported reimbursement of health insurance premiums paid by an employer, and not by employees, is not excludible from those employees' gross income under Secs. 106(a) and 105(b). Because the reimbursement payments were not reimbursements of expenses incurred for parking, they are not excluded from wages for FICA, FUTA or income tax purposes. REV. RUL. 2004-98, IRB 2004-42, 664