Can Commuter Benefits Be Refunded Under IRS Rules?
Understand the tax principles behind commuter benefits and why IRS rules prevent cash refunds, impacting how you can use or retain your remaining balance.
Commuter benefits are a tax-advantaged program employers offer to help their staff with daily travel expenses. Formally known as qualified transportation fringe benefits, they allow employees to set aside a portion of their pre-tax salary for specific commuting costs, which lowers their taxable income. A common question for participants is what happens to unused funds in these accounts and if they can receive a cash refund.
The IRS “No-Cash-Refund” Rule
The Internal Revenue Service (IRS) has established regulations that prohibit cash refunds for unused commuter benefit funds. This rule is a federal mandate tied to the tax-advantaged status of the benefit, governed by Internal Revenue Code Section 132. For 2025, the monthly exclusion limit is $325 for qualified parking and a separate $325 for transit passes and commuter highway vehicle expenses.
The core reason for the no-refund policy is a tax principle known as “constructive receipt.” If an employee could choose to receive the unused funds as cash, the IRS would consider that money to have been available to the employee as taxable income from the start. Allowing a cash-out option would negate the pre-tax nature of the benefit, making the funds subject to federal income and payroll taxes. To maintain the program’s tax-free status, the funds must be used exclusively for qualified transit expenses.
Once an employee designates a portion of their salary for commuter benefits, those funds cannot be converted back into taxable wages. Unlike some other benefit accounts, these funds are specifically earmarked for transportation, and circumstances like a change in commute do not permit an employer to refund unused dollars.
Permissible Uses for Unused Funds
Since cash refunds are not an option, employees must use their remaining balance on qualified transportation expenses. These funds can be carried over from month to month and even year to year, as long as the employee remains with the company. This feature allows flexibility for those whose commuting costs may fluctuate.
One primary category for these funds is transit passes. This includes fare for subways, buses, light rail, and ferries. Employees can use their benefit debit card or submit claims for reimbursement for passes and fare cards used for their daily commute between their home and workplace.
Another approved use is for transportation in a commuter highway vehicle, commonly known as vanpooling. This applies to services where multiple employees travel together to work. To qualify, the vehicle must have a seating capacity of at least six adults, not including the driver.
Qualified parking is a distinct category of eligible expenses. This allows employees to pay for parking at or near their work location or at a spot from which they commute to work via transit or carpool. Eligible costs can include monthly parking garage fees or daily meter fees. Parking at or near an employee’s residence is not a qualified expense.
Impact of Employment Changes on Your Benefits
Leaving a job, being laid off, or shifting to a permanent remote work arrangement directly affects your commuter benefits. These benefit plans are owned by the employer, and the funds are not portable, meaning you cannot take them with you to a new company. When employment ends, access to the account and any remaining funds is terminated on the official separation date.
This leads to the principle of forfeiture. Under IRS regulations, any unused money in a commuter benefit account is forfeited upon termination of employment. The funds are returned to the employer, who may use them to cover administrative costs of the plan. The employer is strictly prohibited from cashing out the remaining balance to the departing employee.
Many employers offer a “run-out” period, which is a window of time after the termination date during which an employee can submit claims for reimbursement. This period, often around 90 days, allows employees to claim eligible expenses that were incurred before their last day of work. Employees should check their plan documents or contact their HR department to understand the length of any grace period and the deadline for submitting final claims.