Higher Tax Break for Transit Benefits Expired at End of 2011

Tax exclusion limit on transit benefits drops to $125 per month; parking benfits rise to $240

By Stephen Miller, CEBS Jan 3, 2012

Update: On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8), preventing the U.S. from going over the impending “fiscal cliff.” The legislation extends through 2013 the increase in the monthly tax exclusion for transit and vanpool benefits. This provision restores the parity of the benefit to fund on a pre-tax basis public transportation and vanpool expenses, up to the same limit as commuter parking expenses—$240 per month. On Jan. 1, 2012, the amount that could be set aside to cover parking costs as part of a commute to work increased from $230 to $240 per month due to a cost of living adjustment. At the same time, benefits for public transportation commuters were reduced to $125 per month.

Employers generally can exclude the value of transportation benefits from the employee’s wages up to the IRS limits. As employees save money, so do employers through reduced payroll taxes that can offset the cost to implement a benefits program. Alternatively, employers can offer subsidized commuter benefits as an employee benefit. See "'Fiscal Cliff' Bill Affects Payroll Tax Withholding and Employee Benefits."

Originally posted 12/6/11; updated 1/3/12

As of Jan. 1, 2012, U.S. commuters are seeing their monthly income and FICA tax exclusion for transit passes shrink from $230 to $125 because Congress failed to extend the temporary higher tax exclusion limit, which expired at the end of 2011.

However, also beginning Jan 1, 2012, the tax-free parking benefit has increased from $230 to $240 per month, according to the Internal Revenue Services' 2012 Employer's Tax Guide to Fringe Benefits. The IRS adjusts these benefits annually from the statutory limit to keep pace with inflation.

Employers generally can exclude the value of transportation benefits from the employee’s wages up to the IRS limits. As employees save money, so do employers through reduced payroll taxes that can offset the cost to implement a benefits program. In addition, employers can offer subsidized commuter benefits as an employee benefit.

Lower Limit for Mass Transit Benefits

The reduction in the tax exclusion for mass transit benefits means the loss of hundreds of dollars of annual tax savings for employees who use these benefits to the limit. In addition, businesses will be required to pay their share of payroll taxes on the amount individuals normally set aside above $125 per month for commuter passes.

Parking Limit Raised

For the 2012 tax year, regular employees are allowed up to $240 per month in tax free parking or subsidized parking up to that amount. Any amount over the taxable amount should be included in gross income. Parking benefits are to be valued according to regular commercial price for parking at the same or a nearby location.

Parking must be on or near the employer's premises or at a mass transit facility such as a train station or car pooling center.

According to the Society for Human Resource Management's 2011 Employee Benefits research report, 12 percent of SHRM members provided a transit subsidy while 8 percent provided a parking subsidy. In addition, 8 percent of organizations offered qualified transportation spending accounts—a specific type of a flexible spending account that deducts a portion of an employee’s pretax earnings to an account that reimburses the employee for transportation expenses

Legislative Background

Prior to passage of the American Recovery and Reinvestment Act of 2009, tax-free reimbursement for parking benefits was limited to $230 per month while the reimbursement for mass transit benefits was limited to $120. The 2009 act raised the transit benefits amount to $230 to provide parity between transit and parking benefits. In 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act extended this parity until the end of 2011.

The expiration of the higher tax-exclusion limit for transit passes was just one of the many tax benefits on the chopping block at the end of 2011.

The value of Transit Benefits

Pre-tax commuter benefits can save each employee hundreds of dollars a year, lowering the amount that employers otherwise would have to pay to offset higher gas and transit prices.

Since 1993, the Internal Revenue Service has allowed workers in the U.S. to set aside a portion of their gross income to pay for transit and vanpool commuting costs. Employees who participate can achieve tax savings equivalent to 30 to 40 percent of their out-of-pocket commuting expenses.

Offering a commuter benefits program also can help employers lower their payroll taxes. This benefit, which can only be offered to workers through their employers, is typically delivered via a debit card, transit pass or payment voucher on a monthly or quarterly basis.

One continuing challenge: while employees are eager to participate in a tax-free commuter benefit program, the availability of sufficient mass transit often is lacking.

"For many employers, it would feel like the rug is being pulled out from under them if Congress fails to address the transit provisions before the end of the year," Ira Mirsky, a partner at the law firm McDermott Will & Emery in the employee benefits practice group, said prior to the expiration of the higher tax exclusion limit.

"If Congress doesn't stay the course and extend this provision as they've done in years past, most employers will be left to pick up the pieces in this tough economy, and labor under higher payroll taxes at the same time," he noted.

"For both employers and individuals, decisions must be made about monthly deductions in advance because the tax rules require employees to elect to reduce their compensation for transportation benefits (whether for mass transit, commuter vanpool or parking) before they are otherwise entitled to receive payment of the compensation," Mirsky advised.

He added, "It's important for Congress to remember the policy reasons behind why these transportation fringe benefits were offered in the first place: to help the Environmental Protection Agency to reduce pollution and traffic by creating incentives to encourage more commuters to use mass transit."

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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