Unless your company is fully staffed by remote employees, your workers have some sort of commute to arrive at the office. If they’re like me, they drive an hour to the office every day. If you’re in a large city, your employees may take public transportation to get to work.
No one likes a long or traffic-filled commute (if you do, let me know). That being said, there are commuter benefit programs out there that could actually provide your employees with big tax savings, hopefully providing a silver lining to that long commute.
As a reminder, the Tax Cuts and Jobs Act (Tax Reform) passed in late 2017 eliminated the employer deduction for employee assistance in the form of parking or transit benefits. However, this change did not affect an employer’s ability to offer a parking and/or transit benefit to their employees or an employee’s ability to withhold pre-tax funds to pay for qualified expenses. In fact, some cities and states have begun mandating that employers make these benefits available to employees; we’ll get into that a little later.
What are transit and parking benefits?
A commuter benefit program offers employees tax-advantaged benefits to pay for expenses incurred for parking, public transportation and vanpooling expenses to and from the office. There are two separate benefits available: Parking and Transit/Vanpool accounts. Here’s a breakdown of what each benefit entails:
Transit and Vanpool benefits:
- $265 pre-tax per month set aside to pay for mass transit and vanpooling expenses.
- Eligible expenses include ticket vouchers for public transportation (including subways, ferries and buses) and costs to participate in an employer sponsored vanpool.
- Uber and Lyft may qualify.
- Bridge or highway toll expenses are not eligible for reimbursement.
- $265 pre-tax per month allocated for parking expenses at/near work or public transportation lot.
Parking and transit/vanpool accounts may only reimburse expenses incurred to enable the employee to commute to work and cannot be used to reimburse expenses for another family member or for non-work-related reasons. For commuter benefits, elected amounts can be changed as often as an employer’s policy allows, as set forth in the plan document. The use-or-lose-rule doesn’t apply, so balances roll into the next plan year. However, once contributed, funds cannot be cashed out, they can only be used for qualified parking or transit expenses.
The maximum monthly limits described above also apply to the maximum amount that can be reimbursed per month pre-tax. An employee cannot be reimbursed more in a subsequent month simply because they spend less for any given month. For example, if an employee only incurs $250 in parking expenses in one month, they cannot be reimbursed $280 pre-tax in the subsequent month, because that exceeds the statutory limit.
Tax savings for employees.
Remember those tax savings I mentioned? Here’s how that would play out:
Suppose an employee contributes the maximum available per month to both parking and transit accounts ($265 each) in 2019, resulting in $530 per month set aside for transportation benefits. Those contributions would ordinarily be subject to income taxes.
For this example, suppose the participant is in a 25% tax bracket (including federal, Social Security, FICA and state taxes). Because these funds benefit from tax favored status, the employee would enjoy monthly savings of $132.50. Annually, that would result in a savings of $1,590!
Three places that have implemented transit benefit mandates.
Some cities and states now mandate that employers provide pre-tax transportation fringe benefits to their employees. Notably, these laws only require employers to offer pre-tax transit and vanpooling benefits, i.e., employers are not required to provide pre-tax parking benefits as part of their commuter benefit plan. Although this benefit is not required, employers may offer this benefit under federal law. However, merely offering a parking benefit will not satisfy the transit mandates.
These examples are not exhaustive and many other cities around the country have or are implementing transit mandates. Make sure to check with your broker or tax professional to further discuss laws in your area.
Remember, regardless of the design of the transportation benefit provided, employers may no longer take a tax deduction for contributions made to employees’ transit benefits or for the amounts withheld by employees pre-tax to these accounts.
Washington, D.C.’s Transit Benefits Requirement Act took effect on January 1, 2016. Under the law, employers with at least 20 employees working in D.C. must offer transit benefits in the form of one of the three following options:
- Employee-paid, pre-tax benefit allowing employees to set aside income on a pre-tax basis to cover qualified transit expenses;
- Employer-paid, direct benefit offering a tax-free employer subsidy for qualified transit expenses; or
- Employer-provided transportation offering a shuttle or vanpool service at no cost to employees.
Who does this affect?
Private employers, including nonprofits, with 20 or more employees (both full and part-time) working in D.C. must comply. Employers must provide benefits to all employees performing 50% or more of their work in D.C. and employees will be eligible for benefits after 90 days of employment.
Are there penalties for non-compliance?
If an employer does not provide commuter benefits, they will be subject to penalties ranging from $50 to $2,000 for the first offense.
New York City
New York City’s Commuter Benefits Law took effect on January 1, 2016. Under the law, for-profit and nonprofit employers with 20 or more full-time, non-union employees in NYC must offer their full-time employees the opportunity to use pre-tax income to purchase qualified transportation fringe benefits.
Who does this affect?
Private employers with 20 or more full-time employees in NYC must offer their full-time employees, working 30 or more hours per week, the opportunity to use pre-tax income to pay for their transportation by mass transit or a commuter vehicle. Those who are exempt:
- Federal, state and local government employers.
- Employers whose employees are covered by a collective bargaining agreement (CBA). However, if the employer has 20 or more full-time employees not subject to the CBA, then they’re subject to the requirements.
- Employers who are exempt from city, state, and federal payroll taxes.
This law applies to “chain businesses,” a group of companies that operate under a common owner and of which the majority are in the same business or are connected under a franchise agreement. Chain businesses must count all full-time employees working at all of the business’ locations in NYC to determine whether they are subject to the transit requirements.
Are there penalties for non-compliance?
Failure to comply with the law will result in a penalty of $100-$250 for the first offense. Additional penalties of $250 may be imposed after every additional 30-day period of non-compliance.
On March 1, 2019, New Jersey signed a bill into law that requires every employer with at least 20 employees to offer all employees the opportunity to use a pre-tax transportation fringe benefit.
Who does it affect?
Employers, including state and local government employers, located in New Jersey with at least 20 employees, must offer all employees, as defined in New Jersey’s state unemployment compensation law, the opportunity to use pre-tax transportation fringe benefits. The employer must provide commuter highway vehicle and transit benefits consistent with the provisions and limits of IRC Section 132 to be deductible from an employee’s gross income. The benefits must be provided at the maximum benefit levels permitted under federal law, so employees will be able to withhold pre-tax the full amount permissible for these benefits ($265 in 2019).
Employees who are exempt: employees covered by a CBA, until the agreement expires, and those who work for the federal government.
When does the law take effect?
While the law went into effect immediately, employers are not required to provide benefits until March 1, 2020, or, if sooner, the effective date that rules and regulations are adopted by the NJ Commissioner of Labor and Workplace Development. While the law may not take effect until 2020, employers who do not currently offer commuter benefits meeting the requirements of the law should consider adopting such a program as soon as possible because the regulations may require that the benefit come sooner. Employers may also want to discuss the tax implications of a transit benefit program with their tax advisors.
Are there penalties for non-compliance?
Failure to comply with the law will result in a penalty between $100 and $250 for a first violation. However, employers have 90 days to offer a pre-tax transportation benefit before the penalty is imposed. After 90 days, each additional 30-day period that the employer fails to offer the benefit will result in an additional penalty of $250 each month.
How can PrimePay help.
- Pre- and post-tax contribution management to meet the transit mandate requirements for eligible transit services.
- Debit card convenience for purchasing qualified transit expenses.
- Optional: Add a parking account to allow employees to use pre-tax income to pay for qualified parking expenses under the federal tax law. No additional administrative fee to add this account.
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Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.