What Happens After Tax Law Scuttles Employers' Deduction for Commuting Benefits?

Some businesses may reconsider popular perk if tax reform bill becomes law

By Stephen Miller, CEBS Dec 12, 2017
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updated on Dec. 22, 2017

Employees like receiving subsidies from their employers to defray commuting and parking costs, but the Tax Cuts and Jobs Act could drastically transform these common benefits.

On Dec. 22, 2017, President Donald Trump signed into law the tax legislation, which will eliminate the business deduction for qualified mass transit and parking benefits

Nonprofit employers aren't spared: Tax-exempt employers will be subject to the tax on unrelated business income for any qualified transportation benefits provided to employees.

Qualified transit and parking benefits, however, will continue to be tax-exempt to employees, who can pay their own mass transit or workplace parking costs through an employer-sponsored program, using pretax income.

The tax act also eliminates the tax exclusion on costs related to biking to work, although the exclusion would return in 2026. 

Tax Limits on Commuter Benefits

Internal Revenue Code Section 132(a) excludes eligible transit-program funds from employees' gross income, subject to federal taxes. Many states also exclude these monies from state and local taxes.

Under IRS limits for 2017, employee transit benefit programs allowed employees to use pretax dollars for, and business to deduct, their contributions of:

  • $255 per employee per month in transportation expenses.
  • $255 per employee per month in parking expenses.
  • $20 per employee per month for biking-related expenses.

For 2018, the tax-excludable limit for both transportation and parking expenses rises to $260 per month, the IRS announced in October 2017.

The Employers Council on Flexible Compensation (ECFC) in Washington, D.C., which represents sponsors of account-based benefit plans, opposed cutting back tax benefits for commuters.

The favorable tax treatment of mass-transit benefits, for instance, "doesn't just help employees by incenting them to use public transportation, but it also reduces the costs to government for transportation infrastructure as more people rely on public transportation," said Bill Sweetnam, ECFC legislative and technical director.

A Popular Perk

One-third of recently polled employers (32.9 percent) offer incentives to employees who use mass transportation, carpool, bike or walk to work, according to the Brookfield, Wis.-based International Foundation of Employee Benefit Plans (IFEBP), an association of benefit plan sponsors.

In December 2017, the IFEBP published Transportation Benefits and Incentives: 2017 Survey Results, based on a poll conducted in November, with responses from 289 U.S. organizations across a range of sizes, regions and industries.

  • Among employers that offer mass transportation incentives, 56.8 percent have a pretax benefit program in place, enabling their workers to exclude mass transit or carpool costs from their gross taxable income.
  • Among employers that offer mass transportation incentive programs, nearly one-third of workers (31.1 percent) participate, the IFEBP survey shows.

Attracting and retaining talented workers is the main reason organizations offer transportation incentives. However, "the second most common reason employers offer transportation benefits and incentives is in response to worker requests," said Julie Stich, CEBS, associate vice president for content at the IFEBP. "If employers' tax advantages are gone but workers want the benefit, it could cause a bit of a conundrum" as to whether employers should change their policy or continue to offer a benefit that isn't deductible as a business expense.

Some employers will have to continue providing transit benefits even without a federal tax deduction, given that a growing number of cities and localities—including New York City, Washington, D.C., and San Francisco—are mandating that most employers offer these benefits.

Of those employers that offer transportation incentives, 31 percent are located in jurisdictions with mandatory commuter benefit ordinances, the IFEBP survey found.

"On its own, eliminating the tax deduction for employers may seem like a disadvantage to offering these benefits, although some employers would still need to do so to stay competitive and to comply with state and local laws," said Bobbi Kloss, HR leader at Benefit Advisors Network (BAN), a Cleveland-based consortium of health and welfare benefit brokers.

"Employers should look to see how, or if, the corporate tax rate decrease [in the final tax bill offsets any loss of the deduction," Kloss advised.

She added, "Strategically, I encourage employers to look at the line items of their HR resources, including nonmandatory benefits, as an entire package" to make a cost/benefit determination on how benefit spending affects hiring, retention and engagement.

(Click on graphic to view in a separate window.)

17-1667 Commuting Benefits 2.jpg

Parking Benefits

With the majority of employees driving their own vehicle to work, parking benefits and incentives are a major perk. More than four in five organizations (82.7 percent) offer some type of onsite parking, with 43.3 percent providing free parking, the IFEBP survey showed.

About 1 in 10 respondents (10.4 percent) offer full or partially reimbursed parking fees. These are the employers that would be affected by eliminating the deduction for parking subsidies.

"Employers that rent space from the same entity that owns the applicable parking facility might be able to renegotiate their lease in a way that includes free parking," suggested Lowell J. Walter, a tax attorney with law firm Carlton Field in Tampa, Fla.

[SHRM members-only toolkit: Designing and Managing Flexible Benefits (Cafeteria) Plans]

Biking Benefits

Of employers offering biking/walking transportation incentives, the IFEBP survey showed that:

  • 44 percent provide onsite bicycle storage.
  • 39 percent provide locker rooms and showers.
  • 19 percent offer bike-to-work subsidies, allowances or reimbursements.

As noted above, under the Tax Cuts and Jobs Act, employers are no longer able to deduct biking benefits expenses, although the exclusion would return in 2026. 

Jenny Sherman, HR manager at Unitus Community Credit Union in Portland, Ore.—named by the Portland Business Journal as one of Oregon's most admired companies—believes it's important to support bicycling to work.

"Because Portland is such a bicycling-friendly city, employees who bike to work have expressed a desire to be paid more for their choice," she said.

For employees who bike to work, "we pay a $10 per month fee so they have access to a shower onsite through another organization in our building. In addition, employees can bicycle for a few months and then switch to mass transit when bicycling isn't possible [in bad weather], and we reimburse 100 percent of the mass transit costs," which range from $100 to $125 per month.

"Someone could bicycle March through September and use mass transit" in other months, she said.

"Because we're located downtown, we encourage people to use the mass transit system and we don't provide a comparable benefit for employees who choose to drive to work," Sherman added. "If they drive, they do have a pretax parking benefit [payable through a payroll deduction], but no subsidy other than that."

What's Ahead?

With the enactment of the tax bill, some businesses are likely to stop subsidizing their employees' mass transit and parking costs while allowing employees to contribute their own dollars through pretax payroll programs. 

"Employers who were simply giving away parking and transit passes in prior years"—and claiming the business deduction—"may want to switch to a pre-tax salary reduction plan starting in 2018," advised Mark Stember, a partner with Kilpatrick Townsend in Washington, D.C.

Still, many employers will continue to contribute to their workers' transit cost even without the business deduction.

"Even though we'd be disappointed, the tax deduction wasn't the motivation behind the benefit so we wouldn't expect the loss of it to impact the program," said Gayle M. Evans, senior vice president and chief HR officer at Unitus Community Credit Union, prior to the passage of the tax bill.

Update: FICA and FUTA Exclusions

Although no employer deduction is allowed for providing qualified parking and transportation benefits, payments for qualified parking and commuter expenses/transit passes may be excluded from employees' wages.

Also, "it appears these benefits are still excluded from FICA and FUTA" payroll taxes that an employer withholds and/or pays, according to an April 2018 post by HUB International, a Chicago-based employee benefits and insurance broker. "The tax code says FICA and FUTA do not apply to qualified transportation fringe benefit amounts if the employer reasonably believes they can be excluded from the employee's income," HUB said. "This exclusion appears to apply whether the employer pays for the transportation benefit directly or the employee reduces his/her salary to pay for it. However, additional confirmation from the IRS on this point would be welcome."

Benefits attorney Sherrie Boutwell, a partner with Boutwell Fay LLP in Newport Beach, Calif., explained in a March 2018 post that establishing a qualified plan allows employees to pay for their own parking and transit expenses on a pretax basis through a salary reduction election. "The good news is that under current guidance, with this type of salary reduction plan, and even if the employer's income tax deduction is lost, the employees should still avoid income tax and amounts paid through the plan...should not be subject to FICA and FUTA taxes."



Related SHRM Article:

Congress Passes Tax Bill Altering Employee Benefits, SHRM Online Benefits, December 2017


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