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Vanpooling Clarified in IRS Information Letter

The IRS released Information Letter 2014-0028 on September 26, 2014 regarding vanpooling. This letter is in response to a recent inquiry surrounding an employer-sponsored transit plan and reminds employers about qualified vanpooling expenses. Department of Treasury information letters provide general statements of well-defined law without applying them to a specific set of facts; however, they can provide insight and clarify intent.

Since 1985, when Section Code 132 first became effective, employers have been permitted to provide transportation fringe benefits such as qualified parking, transit passes, and transportation in a commuter highway vehicle to employees on a tax-free basis. Transportation in a commuter highway vehicle must be used for travel between employees' residences and places of employment. This is known as "vanpooling." A commuter highway vehicle is any highway vehicle that meets the following conditions:

  • Has a seating capacity of at least six adults (not including the driver)
  • At least 80 percent of the mileage use can reasonably be expected to be:
    • For transporting employees between their residences and their places of employment, and;
    • Used on trips during which the number of employees transported for such purposes is at least 50 percent of the adult seating capacity (not including the driver)

These requirements are sometimes referred to as "the 80/50 rule." The 80/50 rule does not include a requirement that the employee use the vanpool at least 50 percent of the time and transportation is considered as provided by the employer if the transportation is furnished via a commuter highway vehicle operated by or for the employer.

Information Letter
Employer- and employee-operated vanpools, as well as private or public transit-operated vanpools, may constitute qualified transportation fringes:

  • Employer: In an employer-operated vanpool an employer either purchases or leases a van to enable employees to commute together to the employer's place of business or the employer contracts with and pays a third party to provide the van and pays some or all of the costs of operating the van.
  • Employee: In an employee-operated vanpool, the employees, independent of their employer, operate a van to commute to their places of employment.
  • Private or Public: This means public transit authorities or a person in the business of transporting persons for compensation owns or operates the vanpool. In this case, the 80/50 rule does not apply. An employer is directed to distribute transit passes for public or private vanpools. That amount cannot be more than the statutory monthly limit. If an employer is providing cash reimbursement for a privately operated vanpool it can do so only if a transit pass is not readily available. In this case the special rules for cash reimbursement, including the substantiation requirements, apply.

Both employer- and employee-operated vanpools must comply with the 80/50 rule as outlined in Section 132(f) (5) (B) (ii). Assuming the 80/50 rule is met, the employee receives a pre-tax benefit equal to the value (up to the statutory monthly limit) of an employer-operated vanpool.

When the vanpool is employee-operated, the employer's cash reimbursement to employees for expenses (subject to the statutory monthly limit) is a non-taxable qualified transportation fringe benefit. The employee must substantiate the cash reimbursement.

The statutory limit for 2014 and 2015 for transit passes and vanpooling, combined, is $130 per month.

For more information, click here for IRS Information Letter 2014-0028

Click here to download this update.