Employers may offer commuting fringe benefits that save the company and the employee money by reducing tax obligations.
Known as Commuter Benefits, they apply to qualified vanpool, transit, and parking cash-out programs. Not to be confused with cafeteria benefits, the federal tax code, Title 26 USC Section 132 (f)(2)(b) describes these qualified transportation fringe benefits.
Transit or vanpool benefits combined are not to exceed $130 per month. Employees can receive tax benefits of up to $380 per month if they use both (1) transit or vanpool benefits along with (2) parking space cash-out to commute to work.
Benefits More than the Limit
Additional transportation benefits that are provided by the employer above IRS-established limits must be reported as employee wages.
Employee payments into the plan, however, must roll-over from month-to-month. There can be no use it, or lose it policy for qualified transportation benefit programs.
De Minimis Transportation Benefit
The employer may exclude from employee wages any transportation benefit that is so small that record keeping would be unreasonable. For example, this could include paying for an employee’s ride home if they have been asked to work overtime and if the amount paid is not tied to the number of hours worked.
Vanpool (Commuter Highway Vehicle)
Employers may exclude up to $130 from wages per employee per month tax-free for commute-based vanpools. The vehicle must seat at least seven people, including the driver. Additionally, the van must be half-full (not including the driver) with employees and 80% of the miles traveled must be commute-related. Vanpools may be employee-owned, employer-owned, employee-leased, employer-leased, or operated by a public transit agency.
Employers may exclude up to $130 from wages per employee per month tax-free for providing transit passes to employees for mass transit commutes that occur via rail, bus, or ferry. A transit pass is any pass, token, fare card, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate.
The transit passes must be purchased through a bona fide reimbursement arrangement or via direct payment for transit passes by the employer. Cash payments to employees may only take place if transit vouchers are unavailable, if vouchers could only be issued by charging a fare media charge, if vouchers that may be exchanged for transit passes are not available, or direct payment for transit passes by the employer is not possible.
Employees receive the transportation (commuting) benefit free from payroll taxes. The benefit may be provided at (1) the full cost of the employer, (2) employees may reserve income on a pre-tax basis to pay for the transit/vanpool benefit, or, (3) employers and employees may agree to share the transit/vanpool expense. The deduction from the employee’s paycheck would be pretax and not part of other cafeteria style plans.
Parking Space Cash-Out
Employers may exclude up to $250 from wages per employee per month for a qualified parking space cash-out program. The parking spaces must be located either at or near the work site. The cash-out must take the place of free or subsidized parking provided by the employer.
Employees may either receive a qualified cash payout, a transit pass, or vanpool subsidy.
Each of the three options:
- May be treated as an exclusion or a payroll deduction.
- May be a combination of programs.
- Result in federal income, payroll, and/or business income tax savings.
A qualified bicycle commuting reimbursement means any employer, if they chose to do so, may provide a reimbursement of up to $20 per month for reasonable expenses incurred by the employee in conjunction with their commute to work by bike.
Please note however, that unlike the other qualified transportation fringe benefits, a qualified bicycle commuting reimbursement benefit cannot be funded through employee pre-tax income, nor can an employee receive both the transit and bicycle qualified transportation fringe benefit in the same month.
(Legal disclaimer: The analysis provided was written by League legal intern Gregory T. Simmons. It was not performed by a lawyer and is provided only for our reader’s interest and information, not as legal advice. Employers, before making any decisions affecting your tax liability, you should consult your accountant or tax legal adviser).