Traffic congestion and the rising cost of commuting are prodding more employers to offer transit benefits. Another spur: employees can use pretax dollars to pay for certain commuting costs.
Start with Pretax 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 current IRS limits, in 2017 employee transit benefit programs can allow employees to use pretax dollars to cover up to:
- $255 per month in transportation expenses.
- $255 per month in parking expenses.
- $20 per month for biking-related expenses.
[Update: For 2018, the tax-excludable limit for both transportation and parking expenses will be $260 per month, the IRS announced in October 2017.]
In high-tax locations, like New York City, using pretax money can save employees up to 30 percent to 40 percent on their commuting costs.
These programs yield benefits to employers, too. Any pretax money that employees use for these benefits is also exempt from employers' payroll taxes.
In cities where employers are required by law to provide transit benefits, the local transit authorities will often provide information and support to employers that want to set up these programs. Third-party administrators can also help set up and administer these programs.
"In some cases, the vendor will provide a debit card that employees can use to purchase transit passes with pretax dollars," said Julie Bond, program director for Best Workplaces for Commuters. "In other cases, employees receive their passes in the mail."
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A Valued Benefit
"A lot of employees are asking, 'How do I make this commute into my office either less expensive or more efficient and convenient?'" said Dan Neuburger, president of WageWorks commuter services in San Mateo, Calif. Adding to this pressure is the growing number of cities and localities—including New York City, Washington, D.C., and San Francisco—that are mandating that most employers offer these benefits on a tax-free basis.
However, mandates and tax considerations should not be the only drivers of transit benefit design. Asking employees what they need to better manage their commutes to work could yield some important insight into how to expand these programs to meet the needs of a broader array of employees. In doing so, employers can build a program that can both reduce payroll taxes and help to attract and retain a talented workforce.
A 2016 survey of 76 U.S. and Canadian employers conducted by Best Workplaces for Commuters, a public-private partnership that promotes transit benefits, and the Association for Commuter Transportation found that:
- 69 percent of employers offering employee transit benefit programs reduced their need for parking spaces.
- 59 percent improved community relations.
- 53 percent reduced local traffic congestion.
Look Beyond IRS Limits
While the tax-free elements of a transit benefit program are important to most employees, employers should also consider what a transit program using after-tax dollars can offer. Employees living and working in areas that are not well-served by public transportation but that have free parking might not be able to take advantage of pretax transit benefits. In these cases, carpooling, telework opportunities and flexible schedules might be better options for helping employees manage their commutes.
An employer-provided carpool program, for example, could offer a ride-matching service that helps employees who live near each other form car pools or use van pool services.
However, it is important to keep in mind that any monetary car pool incentives an employer might offer are considered taxable income for the employee, while van pool incentives are not.
"Listen to your employees and find out what their needs are," said Bond. She suggested that employers survey their workforce to see what transit benefits employees want and will use. "It must be of value to employees because you don't want to set up a program that no one will use," she said.
Get In on Ride-Sharing
The growth of ride-sharing companies like Uber and Lyft is adding another dimension to transit benefits. "Ride-sharing will continue to grow as a form of commuting to and from work," said Neuburger. "That will not necessarily be in lieu of mass transit but could be used for the first and last mile of the commute"—that is, getting to mass transit hubs from home and from the workplace.
Ride-sharing services are partnering with transit benefit administration vendors to offer ride shares in a tax-compliant way so that they can be paid for with pretax income. Under IRS rules, the vehicles used must have seating for at least six adults, not including the driver.
Another role for ride-sharing services is in providing emergency rides home for employees using mass transit. This is especially important for employees who are used to driving themselves to work and may be unwilling to give up the freedom associated with that—especially if they have children or caregiving responsibilities and may need to get home on short notice.
Providing emergency rides home can be a way to address these concerns and encourage employees to try alternative commuting options.
Parking Benefits Are Taxable If Not Done Right
In a January 2017 information letter released in March, the IRS concluded that the benefits an employer provided under its company parking policy were taxable income to the employees because of the way the program was structured.
The employer had contracted for secure parking for its employees in a parking facility near the office. The office paid the parking vendor directly for the parking spots and the cost of the parking was less than the statutory limit found in the tax code.
Employees who wanted to use the secure parking had to agree, in writing, to reimburse the employer by having the monthly parking fee deducted from their paycheck in the month prior to using the parking. Accordingly, the employer had not excluded the cost of the parking from the taxable wages of those employees who had elected to use the parking. Instead, the employer simply deducted the cost of the parking from the employees' after-tax wages.
Section 132(a)(5) of the tax code provides that gross income does not include any benefit that is a "qualified transportation fringe." This includes "qualified parking" provided to employees on or near the business work premises if:
• The parking is on property that the employer owns or leases;
• The employer pays for the parking; or
• The employer reimburses the employee for parking expenses.
If the employer chooses to reimburse the employee for qualified parking expenses, the employer can do so either by providing the reimbursements in addition to the employee's regular wages or, alternatively, the employer can provide the reimbursements in place of pay.
According to the IRS information letter, "This particular employer's arrangement, under which the employer purchases parking spots from a parking vendor and then permits employees to pay the employer for the parking spots using the employees' own after-tax compensation, does not meet the definition of "qualified parking" under the IRC and regulations."
The determination serves as a cautionary reminder to structure parking programs appropriately.
Joanne Sammer is a New Jersey-based business and financial writer.
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