Question: An employee had pretax deductions made from her pay for mass transit passes. She terminated in the middle of January with a balance in her account, which she now wants refunded. Can we do this? If we can, how do we tax the refund?
Answer: You?re off the hook. Refunds of pretax contributions can?t be made to any employee. Under the tax regs, employees can?t revoke their pretax deductions after the beginning of the period (usually a month) for which a pass is provided. Revocations would trigger constructive receipt and, therefore, taxes, since employees could choose whether to receive a benefit or cash.
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