Commuter Benefit Programs – A Way to Address High Gas Prices (Benefit Minute)
Section 132(f) of the Internal Revenue Code allows employers to provide certain tax-favored commuter benefits, a valuable fringe benefit for employees in light of the current high gas prices. This issue of the Benefit Minute describes these qualified transportation programs and provides related compliance reminders.
Types of Commuter Benefits
Qualified transportation programs include parking, transit passes, and vanpooling. The program can be employer-paid, paid via pre-tax compensation reduction or a combination of both. The program may cover current employees but not former employees or self-employed individuals (partners, sole proprietors, and more-than-2% shareholders in a S Corp). There are no nondiscrimination requirements for qualified transportation fringe benefits; however, employers generally extend the program to all employees, especially when paid via compensation reduction.
For 2022, the monthly maximum tax-free benefit is $280 for parking and $280 for transit passes/vanpooling. An employee can receive parking, transit, and vanpooling benefits, or any combination of those benefits during the same month, so long as he or she receives no more than the statutory limit for each type of benefit, generally calculated on the basis of a calendar month. For parking and vanpooling, the monthly limit applies to the amount used in a month. This means amount withheld in one month under a compensation reduction program may be used for parking or vanpooling expenses incurred in a subsequent month, up to the maximum monthly tax-free reimbursement of $280 (for 2022). Transit passes are subject to a different rule because they may be distributed in advance or in arrears. Generally, the transit pass limit applies to the passes provided in a month for that month or for any previous month during the calendar year. Excess reimbursement, if any, must be included in an employee’s taxable income.
Qualified parking includes parking at or near the business premises of the employer as well as parking at or near a location from which the employee commutes. Parking is provided to an employee if the employer directly pays a parking lot operator, reimburses the employee, or provides the parking on premises that it owns or leases. Parking costs incurred at temporary work locations are not qualified parking expenses; however, these expenses may be reimbursed by an employer as a working condition fringe benefit in accordance with an employer’s policy.
Vanpooling means transportation between the employee’s residence and place of employment in a commuter highway vehicle. A commuter highway vehicle is a vehicle with a seating capacity of six or more adults (not including the driver) where at least 80% of the mileage use for a year is reasonably expected to be for transporting employees between their residences and places of employment, and on trips during which the number of employees carried for that purpose is at least half of the adult seating capacity of the vehicle (excluding the driver). The vanpool may be employer-operated, employee-operated, private-operated, or public transit operated. Special requirements apply to private and public operated vanpools.
A transit pass is any pass, token, farecard, voucher, or similar item that entitles a person to transportation (at regular or reduced price) on mass transit facilities. Transit passes are issued by a variety of entities, and apply to different types of mass transit facilities, including bus, ferry, rail, subway, and tramcars.
When transit passes, electronic payment cards, or vouchers to purchase a pass are readily available, an employer (or a third party administrator used by the employer) must purchase the voucher or transit pass and distribute them to employees. In general, vouchers are readily available if the fare media charges are 1% or less of the average annual value of the vouchers and there are no unreasonable non-financial restrictions (such as unreasonable advance purchase or purchase quantity requirements). Cash reimbursement for transit passes is only permitted if the transit passes or vouchers are determined to be not readily available.
Commuter Benefit Program Requirements
A formal written plan document is not required to establish a qualified transportation plan and these programs are not subject to ERISA. However, most employers prepare a written program description that provides the plan design and program requirements. Importantly, the written program should state that cash refunds of unused amounts are not permitted, but current participants can carry over an excess from one month to another to fund future commuter benefits (as long as tax-free reimbursements for any month do not exceed $280 for 2022). Terminated employees forfeit unused amounts. If multi-month transit passes are issued to employees who subsequently terminate employment, employers may be required to impute income for the unused months.
Unless the program is fully employer-funded, a compensation reduction agreement (either in writing or via electronic media) must be completed to elect the amount of compensation to be reduced on a monthly basis. The election must be made before the earlier of the time at which the employee is able to receive the cash or the beginning of the period for which the benefit will be provided. Elections can be changed as frequently as monthly on a prospective basis. Amounts elected under a compensation reduction agreement and related reimbursements up to the monthly limit are exempt from income tax and FICA taxes.
No Employer Tax Deduction
As a result of the Tax Cuts and Jobs Act, the tax deduction for expenses funded by the employer and by pre-tax compensation reduction elections was disallowed beginning in 2018. Although this law change made it less attractive for employers to offer qualified transportation benefits, many continue to offer them, either because the programs are viewed as a valued employee benefit or because they must be offered in certain jurisdictions (see below).
Jurisdictions that Require Commuter Benefits
The following require employers of a certain size to offer a commuter benefit program (generally limited to transit passes):
- New Jersey
- New York City
- Washington, DC
- Seattle, WA
- Specific areas of California
Most employers offer a pre-tax compensation reduction program to meet these requirements.