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.
Qualified Transportation Fringe Benefits
According to the IRS ” for taxable years beginning in 2019, the monthly limitation under § 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $265. The monthly limitation under § 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $265.” Helpful Questions & Answers
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 $265 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 $265 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 $265 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.
(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).