Current IRS Rules on Employer Provided Cell Phones
The IRS views employer provided cell phones as a taxable fringe benefit if the personal and business use cannot be separated out and substantiated. Thus all undocumented use of a university provided cell phone is considered personal and should be taxed as wages to the employee, even if most of the calls are business calls. While the IRS provides for a “no personal use” or a “de minimis personal use” exception from substantiation for vehicles, no such clear exemption is provided for cell phones. Personal calls included in the base plan must still be documented and reimbursed or reported as wages. The fact that these minutes are in the base plan does not change the nature of the minutes from a personal to business use.

The IRS has been focusing on this issue in audits and has issued a reminder[1] that cell phones are “listed property” under IRC §280F (d)(4)(A)(v). There exist onerous substantiation requirements in connection with employee use of listed property, including the amount of the expense, the time and place of the call, and the business purpose of the call.[2] As was stated above, if these records are not kept, no deduction or credit will be allowed for the fringe benefit, i.e. use of the cell phone.

As a result of these requirements and the IRS audits over the past several years, a number of schools have decided to move toward offering employees an allowance for purchase of a cell phone rather than requiring employees to meet the very high bar set by the substantiation requirements. See below for sample cell phone policies and other resources.

Substantiating Use of Employer Provided Cell Phones IRS Notice 2009-46
This IRS notice, issued June 8, 2009 seeks comments from the public regarding proposals to simplify the substantiation procedures of an employee's business use of employer provided cell phones. Alternative suggestions are sought by Sept. 4, 2009. Three alternative measures are currently under consideration:

The Minimal Use Personal Method would allow all use to be deemed for employment if an employee can provide the employee with sufficient proof to establish use of a personal cell phone for personal purposes during work hours. Another minimal use method would be adoption of a minimal use standard, such as a number of minutes that could occur on the employer provided cell phone and be disregarded.

The Safe Harbor Substantiation Method would allow an Employer to treat a certain % of employee use as employment related, and the remaining percentage personal, with the employee paying taxes upon the latter, likely 25%. The Statistical Sampling Method would let employers use statistical sampling to determine the employee's average use of the cell-phone for personal calls.

Tax Guidance on Flexible Spending Plans

On May 18, 2005 the IRS announced that employers may modify their flexible spending plans to extend the time period for using money set aside for  health and dependent care expenses for up to 2½ months after the end of the plan year. IRS Notice 2005-42 contains the specifics of the new rule. See also the Department of Treasury press release on this plan. If expenses are incurred by the participant in a new plan year, expenses incurred during the grace period are reimbursed first out of the remaining account balance.  Be aware that the IRS clarified in Notice 2005-86 that an otherwise eligible individual generally will not be able to contribute to a health savings account ("HSA") if the individual is covered by a general-purpose flexible spending account ("FSA") during this grace period.

The final rules on qualified transportation fringe benefits were published at 66 FR 2241 (Jan. 11, 2001).  The regulations are generally applicable for taxable years beginning after December 31, 2001. However, in order to provide a transition period for those affected by the 1 percent safe harbor rule, that rule is applicable for taxable years beginning after December 31, 2003. The regulations are set forth in a “Q and A” format, and specify what type of and how much qualified transportation fringe provided by an employer may be excluded from gross income. The regulations are codified at 26 CFR § 1.132-9.  

The rules for what educational expenses will be considered excludable from income as a working condition fringe benefit are contained at 26 § CFR 1.162-5.  26 § CFR 1.162-5 (a) states in part as follows:  

    (a) General rule. Expenditures made by an individual for education (including research undertaken as part of his educational program) which are not expenditures of a type described in paragraph (b) (2) or (3) of this section are deductible as ordinary and necessary business expenses (even though the education may lead to a degree) if the education--

(1) Maintains or improves skills required by the individual in his employment or other trade or business, or

(2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.
 

Paragraphs (b) 2 and 3, referred to above, exclude from the general rule the following: 1) minimum educational requirements, and 2) qualification for a new trade or business. For example, if a state requires a bachelor's degree for all teachers, yet employs A as a teacher (due to a shortage) without such a degree, any coursework  A takes leading to the bachelor's degree will be taxable. Also excluded as nondeductible is any coursework that will qualify the student for a new trade or business. A change of duties in the same line of business does not constitute a new trade or business. An  elementary teacher may become a high school teacher, and this will not constitute a new trade or business.  

The second general exclusion,  " meeting the express requirements of the individual's employer", is narrowly construed. Only those requirements imposed for a bona fide business purpose of the employer qualify and then only the minimum education necessary to the retention of the individual may be considered.

Case Western University has posted an affidavit online that can be used to implement the educational assistance fringe benefit provision.  

Related Code Provisions 

26 USC § 162 is the provision of the U.S. Code that allows for the deduction of trade or business expenses. 26 USC § 117 deals with exclusion from income of scholarships and fellowships, and 26 USC § 127 deals with educational assistance programs and their taxability.

Cell Phone Policy Resources

Tax requirements and business cell phone use by Thompson Publishing

Executive Compensation: Fringe Benefit Audit Techniques Guide (02-2005 IRS)

University of North Texas Policy

University of Denver Analysis of Cell Phone Fringe Benefit Issue

University of Denver Purchasing Page and FAQ on Cell phones

University of Denver Additional Resources for Implementing Cell Phone Policy

Oakland University Cell Phones Policy