Commuting and Adoption Benefit Amounts Rise in 2019

Employees don’t pay income taxes on the value of these benefits

Stephen Miller, CEBS By Stephen Miller, CEBS November 20, 2018
Commuting and Adoption Benefit Amounts Rise in 2019

updated December 10, 2018.

Employees and employers can put $5 more into monthly transit and parking benefits in 2019, the IRS announced Nov. 15.

Revenue Procedure 2018-57, which increased the annual limit on health flexible spending account contributions by $50 to $2,700, also adjusted limits and thresholds for other employee benefits—most notably qualified transportation and parking benefits, and adoption assistance benefits.

Transit and Parking Costs

Employer-funded parking and mass-transit subsidies are tax-exempt for employees. Using pretax income, employees can also pay their own mass-transit or workplace parking costs through an employer-sponsored salary deferral program.

These expenses include the value of mass-transit passes and van pooling services, and parking on or near the business worksite or a location from which employees commute to work by driving and then using mass transit.

Qualified Transportation Benefit Exclusion
(monthly limits)
2019 2018
Transit passes and van pool services
Qualified parking

Source: IRS Revenue Procedure 2018-57, page 17.

The transportation benefit limit increase, though only an extra $60 per year, "should be welcomed by urban employees with high commuter costs" that often exceed $265 per month, said Danielle Capilla, director of employee benefits compliance at Alera Group, a network of insurance and financial services firms.

Employers, however, will see a more limited gain, because last year President Donald Trump signed into law tax legislation that eliminated the business deduction for qualified mass-transit and parking benefits.

Thirteen percent of employers provided transit subsidies in 2018, up from 10 percent in 2014, according to the Society for Human Resource Management (SHRM) 2018 Employee Benefits survey, which polled 3,218 HR professionals earlier this year.

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

Staying Competitive

"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.

A growing number of localities—including New York City, Washington, D.C., and San Francisco—now mandate that most employers offer these benefits on a tax-free basis.

Kloss pointed out some advantages of providing commuting subsidies:

  • These benefits, within the annual cap, are not subject to Social Security and Medicare payroll (FICA) taxes. FICA taxes are split between employers and employees, so "even employers who are not required by their states to provide commuter benefits may want to weigh the FICA savings that may be achieved," Kloss said.
  • The loss of the business deduction for transit benefits is now less significant given the drop in corporate tax rates to 21 percent from 35 percent, which took effect this year.

"With the tight labor market, employers are finding the competition fierce in attracting and retaining quality employees," Kloss noted. Top management, HR and finance "should be strategizing to use tax-advantaged benefits to promote themselves as an employer of choice."

One innovative approach to transit benefits is being pioneered by SHARE, a service in the greater Columbus, Ohio, area that allows employers to offer rides to and from work (or from the suburbs to public transportation) as an employee benefit. For daily commuting, the service uses a scheduling app that connects co-workers going the same way at the same time with its van fleet.

[SHRM members-only Q&A: Are there any pretax benefits we can offer employees struggling with high fuel and parking costs?]

Tax on Commuting Benefits Hits Nonprofits

Under the Tax Cuts and Jobs Act, as of 2018 tax-exempt nonprofit employers, including charitable organizations, must pay a 21 percent unrelated business income tax (UBIT) on transit and parking benefits provided to employees.

Nonprofit organizations are subject to this tax "whether the employer pays the cost directly or the employee participates in a pretax plan," posted accounting firm Marks Paneth. The North Carolina Center for Nonprofits explained that tax-exempt employers are liable for UBIT on qualified parking regardless of whether they pay for their employees’ parking directly or whether they reimburse their employees for regular parking expenses.

Nonprofits only pay UBIT on transit or parking benefits up to the per employee per month amount that's tax free to employees ($260 in 2018, rising to $265 in 2019). These organizations must file Form 990-T with the IRS.

On Dec. 10, the IRS issued interim guidance on the tax treatment of parking benefits for the 2018 tax year, including some retroactive relief. See the SHRM Online article IRS Offers Relief for 2018 Taxes on Parking Benefits.

Adoption Assistance Programs

For employer-provided adoption assistance programs, the maximum amount excludable from an employee's taxable income in 2019 compared with 2018 for adoption expenses is increasing by $270 to $14,080. 

These payments, however, are not excluded from FICA payroll taxes. Also, excludable reimbursements must be "necessary and reasonable expenses" related to adopting a child, according to the IRS. Qualified adoption expenses, however, don't include expenses that employees pay to adopt their spouse's child.

The amount excludable from an employee's annual earnings begins to phase out for employees with modified adjusted gross income higher than $211,160 and is completely phased out for those with modified adjusted gross income of $251,160 or more.

Adoption Benefits
(Annual limits)
2019 2018
Excludible amount$14,080
Phase-out income thresholds:

Phase-out begins
Phase-out complete$251,160

Source: IRS Revenue Procedure 2018-57, page 17.

* Originally set at $13,840 but subsequently recalculated by the IRS.
** Originally set to begin phase-out at $207,580 and end phase-out at $247,580 but subsequently recalculated by the IRS.

"Adoption benefits typically include some combination of financial assistance, information and referral services, and paid or unpaid leave," according to the SHRM members-only toolkit Managing Adoption Assistance Benefits. "Adopting a child from foster care may cost about $2,500, domestic private adoptions can cost up to $40,000, and international adoptions can cost up to $30,000. Costs may include public or private agency fees, court costs, legal fees and counseling fees."

According to SHRM's survey of employee benefits, 11 percent of employers provided adoption assistance in 2018―up from 6 percent in 2014―as more employers have come to view family-friendly benefits as important to attracting and retaining workers.

Employer programs can provide funds to reimburse adoption costs that exceed the annual limit, although employees will owe income taxes on any above-the-cap dollars they received. In October, for example, San Jose, Calif.-based Cisco Systems announced that beginning in 2019, it will increase reimbursement for adoption and surrogacy to $20,000, up from $10,000, reported the Silicon Valley Business Journal.

Adoption assistance programs must satisfy nondiscrimination testing to show that they do not unfairly favor highly compensated employees.

Tax Credit vs. Employer Assistance

The tax code provides a separate income-tax credit for qualified adoption expenses. For 2019, the maximum credit is $14,080 per child—the same as the maximum nontaxable reimbursement by an employer's qualified adoption-assistance program. Tax credits larger than an employees' tax liability can be carried forward for up to five years.

Employees may take advantage of both the tax credit and the tax exclusion for employer reimbursements—just not for the same expenses.

Because employer-provided adoption aid is subject to FICA, some financial planners advise that high-income employees consider using the tax credit first, although employees who need upfront funds to pay expenses may benefit more from an employers' program.

Related SHRM Articles:

Pretax Savings Technology Lets Employees Keep More of What They Earn, SHRM Online, November 2018

Phased Parental Leave Enhances Family Benefits, SHRM Online, September 2018

Employers Keep 'Green' Commuting Perks Despite Lost Tax Advantages, SHRM Online, May 2018

2019 Inflation-Adjusted Limits and Thresholds:

2019 FSA Contribution Cap Rises to $2,700, IRS Belatedly Announces, SHRM Online, November 2018

For 2019, 401(k) Contribution Limit for Employees Rises to $19,000SHRM Online, November 2018

2019 HSA Limits Rise, IRS SaysSHRM Online, updated November 2018

Due in 2019, Employers' Final PCORI Payment Is RisingSHRM Online, November 2018

2019 Payroll Taxes Will Hit Higher IncomesSHRM Online, October 2018

ACA's Affordability Threshold Rises in 2019SHRM Online, May 2018



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