IRS Issues Letter Reminding Participants that Unused Transportation Funds Cannot be Transferred to Health FSAs

Many qualified transportation plan participants have been wondering what to do with plan balances once the COVID-19 pandemic began and many workers stopped commuting to the office.

One hope was that participants would be able to transfer any of their unused transportation funds to their health FSAs. The IRS recently released an information letter answering this very question. Unfortunately, plan participants will not like the answer.

Cafeteria plans are not allowed to offer qualified transportation fringe benefits. Because of this, the IRS explained that IRS rules do not allow unused qualified transportation funds to be transferred to a health FSA under a cafeteria plan. Because most transportation plans permit monthly benefit election changes and allow plan participants to carry over unused balance indefinitely, participants still have the option to use the funds at a later date. Members can cease contributing new monies to the transportation plan until account balances are utilized. If funds are carried over, plan sponsors and participants will need to be mindful no to exceed the maximum monthly benefit limit. Unfortunately, cash refunds are not permitted.

If you have questions about your qualified transportation plan and what can and cannot be done with unused funds, talk to your OneDigital consultant.