Reimbursement of parking expenses.

• Author: O'Driscoll, David

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...