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As of Jan. 1, 2016, two major East Coast cities, New York City and Washington, D.C., will require employers with 20 or more employees to offer qualified pretax transportation benefits to their workers. San Francisco already has such a mandate in place, as do the nearby cities of Berkeley and Richmond and nine counties in the San Francisco Bay Area.
Many large employers in metropolitan areas voluntarily offer transit benefits to their employees to encourage the use of public transportation. Offering commuter transit benefits makes sense, especially in a major metropolitan area, according to Ian S. Kopelman, chair of DLA Piper’s employee benefits and executive compensation practice group. “These benefits can be very important to employees. They’re low-cost, or even no-cost, benefits from an employer perspective that also benefit the employee financially and the city, since they foster the use of public transportation.”
Commuter benefits were first included in the federal tax code in 1993 as an incentive to encourage the use of mass transportation, with a goal of reducing traffic congestion and environmental pollution. Tax-free commuter benefits, or qualified transportation fringe benefits, are employer-provided voluntary benefit programs authorized under
Internal Revenue Code (IRC) Section 132(a) that allow employees to reduce their monthly commuting expenses for transit, vanpooling and work-related parking costs. However, employees can’t directly access these tax benefits; commuter benefits are available only through an employer.
Amounts that can be excluded from gross income—and which therefore are not taxed as ordinary income—are subject to monthly maximum caps under the IRC. Federal limits in 2015 are $130 for transit/vanpool expenses and $250 for parking expenses; for 2016, the transit cap remains the same, but the monthly limit on parking expenses will increase to $255.
Qualified commuter benefit plans may include:
These choices offer employers a fair amount of latitude in deciding how to structure their benefit programs, Kopelman noted. “An employer can provide partial reimbursement for parking expenses but doesn’t have to. An employer can choose to provide $130 per month to defray employee costs for mass transit, getting a deduction in its federal income taxes, giving the employee a tax-free benefit, and putting fewer cars on the street—a win-win,” he said.
Alternatively, an employer “can set up a commuter benefit account for its employees under which the employee pays for the $130 mass transit benefit in pretax dollars, to her benefit, and the employer doesn’t pay anything.”
Jack Schaedel, a member in Dykema Gossett’s labor and employment practice group in its Los Angeles office, and himself a daily commuter, urged employers to take a good look at the positive tax advantages of offering commuter benefits. If an employer offers this fringe benefit, it should encourage its employees to participate, as greater participation results in tax benefits for both the employee and the employer. Generally, employers save 7.65 percent (or more) in payroll taxes on every dollar set aside as pretax by employees for transit/vanpooling, according to government estimates.
The success of San Francisco’s program and the recent mandates in New York City and Washington, D.C, could possibly signal a trend, Schaedel said, at least in cities that have subways and viable public transportation systems in place. “Other cities may take a wait-and-see approach to see how these new programs play out,” he added.
Meanwhile, employers’ voluntary provision of commuter benefits is “another option,” Schaedel said. He noted that Congress is considering House Resolution 990, the Commuter Benefit Parity Act, and
Senate Bill 1792, the Commuter Benefits Equity Act of 2015, which would amend the IRC to increase the caps for transit fringe benefits to an amount equal to that allowed for qualified parking, currently $250 per month.
Kopelman said he doesn’t find it surprising that more cities are mandating this benefit because it induces more people to take public transportation. “The city wins by having fewer cars on the streets, the employee wins because it’s funded with pretax dollars, and the employer wins by providing a tax-effective or no-cost benefit,” he said.
However, Kopelman warned that cities shouldn’t necessarily decide to require this benefit because placing too many regulations on employers can act as a disincentive to businesses deciding to locate in a given city. “While this type of benefit is certainly a cost-effective way to induce or influence behavior, cities should apply a cost-benefit analysis before mandating that employers provide a commuter benefit plan,” he cautioned.
A recent report by the American Association of State Highway and Transportation Officials, “Commuting in America 2013,” stated that although transit use has been increasing, nearly 77 percent of commuters nationwide still were driving to work alone as of 2013. At least eight states—California, Colorado, Connecticut, Delaware, Georgia, Maryland, Minnesota and Washington—have passed tax incentives to induce employers to offer commuter benefits.
Five Cities and One Region
The five cities and one region—the San Francisco Bay Area, which includes nine counties—that have passed legislation requiring certain employers to provide pretax transportation benefits for their employees have similar programs, but with some significant differences.
San Francisco’s Commuter Benefits Ordinance, which has been in place since 2009, covers businesses located in San Francisco that have 20 or more full-time, part-time or temporary employees nationwide. (Businesses with more than 50 employees across the Bay Area have to register with the Bay Area Commuter Benefits Program instead.) All employees who work at least 10 hours per week in San Francisco are eligible for the benefit. The city law requires businesses to offer eligible employees one of the following transportation benefits:
Companies that don’t comply with the ordinance will receive a written warning notice of the violation. A fine will be imposed if the employer hasn’t come into compliance within 90 days of the initial written notice.
The Bay Area cities of
Richmond have had programs similar to San Francisco’s in effect since 2009. The main differences are that these two cities’ benefit programs are applicable to any employer having 10 or more employees. Any employee of a covered employer who works an average of 10 hours or more per week is eligible for the benefit. Noncompliant employers may be fined.
San Francisco Bay Area Commuter Benefits Program, which went into effect Sept. 20, 2014, requires employers with 50 or more full-time employees to offer a commuter benefit to their employees. Any employee of a covered employer, excluding seasonal or temporary workers, who works an average of 20 hours per week must be offered one of the following benefits:
Employers that do not comply with the law can be fined as much as $1,000 a day.
New York City Affordable Transit Act, effective Jan. 1, 2016, will require employers with 20 or more employees in New York City to provide full-time employees the option of using pretax earnings to purchase qualified transportation fringe benefits, excluding qualified parking. Any full-time employee of a covered employer who averages at least 30 hours of work per week is eligible for the benefit. The law specifies that if the number of workers drops below 20 full-time employees, the benefit must be continued for the remaining eligible employees for the duration of their employment.
Under the new law, roughly 450,000 New York City-based employees will gain access to the benefit, in addition to the approximately 700,000 commuting employees in the city who already are eligible, according to
Certain employers are not covered by the New York City law, including the federal, state and city governments; most employers that have a collective bargaining agreement with their employees; and employers that are not required by law to pay federal, state and city payroll taxes. Further, requirements may be waived for an employer that can satisfactorily demonstrate that offering transportation benefits would present a financial hardship.
Employers will be allowed a six-month grace period in which to comply, after which penalties will be assessed for noncompliance. A first violation carries a penalty of between $100 and $250.
As of Jan. 1, 2016, the
Washington, D.C., Transit Benefits Requirement Act will require employers with at least 20 employees to provide pretax transportation benefits. An employee is defined as any individual employed by an employer, regardless of hours of service.
Employer options include:
Any employer that does not provide commuter benefits after Jan. 1, 2016, will be subject to penalties ranging from $50 to $2,000 for the first offense.
Advantages of Commuter Transit Benefits
Kopelman stressed that HR needs to analyze the cost benefits of a potential plan, so it’s HR that should call the shots in developing a program. “If legal counsel is brought in, they should effectuate the elements that HR believes are valuable.”
Further, when a city mandates a plan, an employer should ensure that its specific plan meets IRC requirements, Kopelman added. “Be sure to get the expertise you need to make sure you’re meeting the requirements, whether that’s getting legal counsel to craft a plan for you or providing master classes to educate your in-house folks on implementing a commuter benefits plan,” he advised. “Otherwise, you’re just throwing your money away.” Employers should also be careful to communicate the adoption of a transportation plan to employees in a positive way to maximize its good-will aspect and derive maximum benefit from the expenditure, he stressed.
Expressing enthusiasm for the fringe benefit, Schaedel focused on the many advantages employers can gain by offering transportation benefits. For instance, transit benefits can be used as a tool to enhance productivity and morale, he said. Using mass transit or biking to work is likely to result in healthier employees with more predictable arrival and departure schedules and less driving-related stress.
However, Schaedel cautioned employers to consult with their lawyers before implementing a transit benefit program to avoid any employment law issues, such as unintended discrimination against employees with disabilities, or unintentionally encouraging hourly nonexempt employees to work off the clock. Los Angeles County and the City of Los Angeles offer commuter benefits to their employees, so private employers that want to implement a plan voluntarily have plenty of models from which to choose, he added.
Employer creativity can spark employee enthusiasm for commuting benefits—and achieve the public policy goal of fewer vehicles on city streets—in many ways, Schaedel said. For example, offering flexible work schedules or alternative workweeks of four 10-hour days, rather than five eight-hour days, results in as many as 50 fewer trips to the office per employee each year.
Other creative approaches include: subsidizing costs of city bike-share programs; contracting with facilities for use of showers and changing rooms to encourage commuters to bike into work; setting up a corporate account for ride-sharing services, such as Uber and Lyft, or UberPool, which takes multiple passengers to proximate destinations; holding participant raffles or drawings; or even starting a company book group to encourage employees to think about how they could use their commuting time more enjoyably on mass transit.
Rosemarie Lally, J.D., is a freelance legal writer and editor based in Washington, D.C.
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