Helping employees reduce their commuting expenses can cut employers' costs, too.
If Carol Boatright drives to work, it costs her 45 minutes to an hour of her time each way plus expenses for gasoline and the wear and tear on her car. Instead, she prefers to use a vanpool program provided by her employer, Georgia Power Co. The program spares her the hassles of driving and cuts her travel time each way to 35 minutes—and it’s free.
Georgia Power’s vanpool arrangement is one of the commuting benefits used by 2,000 of its Atlanta-area employees. Such benefits for trimming employees’ commuting costs are aimed at reducing rush-hour traffic congestion and vehicle emissions by giving workers tax-saving incentives to leave their cars at home. Employers also can get a break through lower payroll taxes when they sponsor commuting benefits that employees pay for with pretax dollars. In addition, advocates say, such benefits cost companies little to run and can boost employee morale.
“There’s less frustration with the vanpool,” says Boatright, a communications coordinator who lives in Jonesboro, Ga., and works 22 miles away in downtown Atlanta. “When I drive, I can’t plan. I might get caught in traffic. The vanpool is more dependable,” partly because it uses less-crowded lanes reserved for high-occupancy vehicles. What’s more, she says, it’s less stressful.
Commuting benefits include mass transit costs, vanpools and certain types of parking arrangements. Such benefits are usually set up so that employees pay transit costs from pretax income, while employers pay the programs’ management costs. Programs can also be run by one of the dozen or so third-party administrators (TPAs) that specialize in commuting benefits.
Some employers pay all or some of participating employees’ costs. Georgia Power, for example, picks up the entire bill, spending about $900,000 per year for vanpools and bus passes, says Jane Franklin, special projects coordinator. ICF Consulting, an 800-person firm based in Fairfax, Va., contributes $32.50 per month toward transit costs for each participating employee, says benefits specialist Laura Slaton. The company’s yearly tab for commuting benefits for 177 participating employees in Fairfax, Washington, D.C., San Francisco and Lexington, Mass., comes to about $57,000 a year, she says.
Tax Relief And Other Pluses
Regardless of how commuting benefits expenses are shared, they confer tax breaks. Employers’ costs are tax-deductible as business expenses. Employees’ costs typically are paid with earnings set aside before taxes, which can amount to tax savings of as much as $40 per month, according to WageWorks, a commuterbenefits provider based in San Mateo, Calif. And unused pretax amounts earmarked for commuting can be rolled over from year to year.
In addition, employers’ payroll taxes are reduced through the pretax arrangement. “Every dollar that an employee puts in … comes off the tax base,” notes Jon Kessler, chairman of WageWorks. “These are programs that immediately produce financial returns for the employer if they’re well run.”
Moreover, several states offer tax breaks for commuter benefits. Maryland, for instance, gives employers a 50 percent tax credit, limited to $50 per employee per month, for the costs of plans that meet Internal Revenue Service (IRS) rules. The Maryland tax break also applies to guaranteed-ride-home programs, which ensure that employees using the vans have a ride home in emergencies or if they work late, and parking cash out, in which employers offer employees cash to give up their employer-subsidized parking spots.
Commuting benefits work well in large cities with good public transportation as well as smaller cities where workers have long commutes, experts say, and also boost recruiting and retention, especially when labor is tight.
“Within a year or two, hiring will be more competitive. These kinds of pretax programs … should be considered,” says Joan Rhodes, CEO of Employee Benefit Specialists Inc., a TPA based in Pleasanton, Calif.
Says ICF’s Slaton: “Recruiting-wise, it has a big advantage. Being an environmental consultant, doing a lot of work for the EPA [U.S. Environmental Protection Agency], it’s important to our employees.”
The Federal Mechanics
Three types of “transportation fringe benefits” are eligible for favored tax treatment, according to the IRS. One type—the most widely used—pays for transit passes such as fare cards and tokens for public or private rail systems, buses, streetcars and ferries.
Another category covers “commuter highway vehicles”—vans that seat seven or more adults, including the driver. The IRS allows pretax benefits of up to $100 per person per month for vanpools and mass transit combined.
The third type of benefit centers on parking costs, generally the costs of parking at a location where the employee then transfers to public transportation or, like Georgia Power’s Boatright, boards a commuter van. The IRS pretax allowance for employees for such parking costs is up to $195 per month.
If commuting costs exceed the IRS limits, employees pay the difference out of taxable income. The IRS adjusts the limits for inflation, although not every year. The money spent on vanpool arrangements is eligible for favorable tax treatment, the IRS says, if 80 percent of the vans’ miles are used for transporting employees to and from work. Employers generally purchase or lease vans and offer a guaranteed-ride-home program.
The IRS doesn’t require a written plan for commuter benefits, but experts say it’s a good idea to have something in writing to show employees. The plan should describe the benefits offered, how to enter and exit the program, how to make and change payroll deduction amounts, and other details.
Setting Up the Program
The employer’s first step in establishing commuting benefits is to determine the kinds of benefits to offer and who will pay for them. Survey workers to learn how they get to work, how they’d like to get to work and how much they spend on commuting.
The employer’s decision on whether to contribute to employees’ costs makes a difference in the outcome, says the Federal Transit Administration’s William B.
Menczer, who manages the federal government’s commuting benefits program, Commuter Choice. “When the employer pays for the benefits, there’s a mode shift of 10 percent to 20 percent … from singleoccupancy automobile to transit,” he says. “If the employee pays, the shift is minimal.”
Ask your local transit agency to make an employer presentation, says David Judd, vice president of marketing at Commuter Check Services Corp., a TPA in Englewood, N.J. “They’re knowledgeable about the options. They’ll walk you through the process.”
Startup tasks are fairly simple: Communicate the benefit to employees in company newsletters, on web sites and in other media. Some employers hold “commuter fairs” or other special events to publicize a plan. Then enroll those who want to participate, and set up payroll deductions if necessary. Although participation may start slowly, Rhodes says, it will “almost always double in the first six months.”
Once a program is up and running, employers order transit passes or vouchers (often done quarterly), store them securely and distribute them (usually monthly). Employers can buy passes in bulk from local transit agencies or commuter-assistance programs. Some companies purchase transit vouchers—coupons that can be redeemed for fares. Vouchers must match fares exactly, however, because no cash can be returned to the user. TPAs can handle the whole process, including startup, for an administrative charge of $5 to $7 per participant per month, not including costs such as vans and transit passes. Small companies can generally handle the program on their own. Although there’s no rule of thumb on when to employ a TPA, one expert suggests 25 participants as the threshold.
Multiple-site employers and those in large metropolitan areas face a more complicated situation because of different transit and payment systems. Also, employees at one location may spend more on commuting than employees at another, so they may want a richer benefit.
One solution is to use cash-like vouchers that can be redeemed on all transit systems.
At the nonprofit American Association for Cancer Research (AACR) in Philadelphia, more than half of the 104 employees make pretax contributions to a plan that provides vouchers good on trains and buses in New Jersey, Pennsylvania and Delaware, says Vern Mitchell, human resource director. The vouchers come in $15, $20, $30, $35, $60 and $65 denominations. Employees determine what they need each month.
Another way to meet employees’ needs in multiple locations is to hire a national TPA that can purchase fares in different cities. TPAs can deliver vouchers and passes by courier, express mail or regular mail to workers’ homes. HR can distribute them with paychecks, through a central office or by simply handing them out.
Still in First Gear
Despite the asserted advantages of commuting benefits—tax savings, for example, and the chance to show corporate citizenship by helping to reduce traffic congestion and air pollution—they have not caught on widely. Only 12 percent of employers offer transit subsidies, according to the Society for Human Resource Management’s 2004 Benefits Survey. “Looking at new programs isn’t high on the radar screen of employers now because it’s seen as a cost,” says Rhodes. In fact, however, employers can find that their tax savings more than offset their administrative expenses, she says. Mitchell says that although her organization spends $8,000 to $12,000 per quarter on vouchers and overhead, “We’re actually saving money.” Another roadblock to establishing commuting benefits, according to TPA specialists, is that HR managers are reluctant to take on additional administrative duties. But some benefits specialists say the tasks are minimal. Although administratively “there’s a lot of work for a day or two at the beginning of the quarter,” says Slaton, who runs ICF’s plan herself, “once it’s set up, it just runs.” Mitchell suggests that HR coordinate with the payroll department to keep the program manageable. At first, the AACR allowed too-frequent changes, she says. Now they’re allowed just once per quarter. Mitchell became a commutingbenefits convert after employees asked for a program. “We were hesitant about the administration,” she says. “We also thought employees wouldn’t be interested if they had to pay for it. Boy, did I misread that one. Employees were thrilled to have it, and they didn’t care if they paid.”
Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.