It’s important to consider what things can be updated in your business. One of the business pieces you review should be your benefits package.
In the highly competitive labor market, businesses are doing whatever they can to attract and retain talent. If your business has employees that commute long distances, like from the suburbs into the city, it may be time to consider offering a commuter benefits program, meaning more tax savings for both you and your employees.
What are transit and parking benefits?
A commuter benefit program allows employees to set aside tax-free money to pay for their commuting to pay for expenses incurred for parking, public transportation and vanpooling expenses to and from the office. The IRS administers the law that allows employers to give eligible employees these benefits. There are two separate benefits available: Parking and Transit/Vanpool accounts. Both amounts have increased to $300 (for each) in 2023. Here’s a breakdown of what each benefit entails:
Transit and Vanpool benefits:
- $270 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.
Parking benefits:
- $300 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 $310 pre-tax in the subsequent month, because that exceeds the statutory limit.
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 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.
Tax savings
Remember those tax savings I mentioned? Here’s an example: Suppose an employee contributes the maximum available per month to both parking and transit accounts ($300 each) in 2023, resulting in $600 per month set aside for transportation benefits. Those contributions would ordinarily be subject to income taxes.
Employee Savings
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 $150. Annually, that would result in a savings of $1,800!
Employer Savings
For this example, let’s say that you have 50 employees with $600 in qualified monthly expenses at 7.65% FICA tax savings. You would enjoy monthly savings on $2,295.00 and annual savings of $27,540!
Eight 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.
New York City
- Effective Date: January 1, 2016
- Applicable to: For-profit and non-profit employers in the five boroughs (Manhattan, Brooklyn, the Bronx, Queens, and Staten Island) with 20 or more full-time employees (30 hours or more per week).
- Requirements: Employers must offer pre-tax commuter benefits for transit but not for parking.
- Enforcement: The Department of Consumer Affairs (DCA) enforces the law and runs public education and outreach campaigns.
Seattle
- Effective Date: January 1, 2020
- Applicable to: Businesses and tax-exempt organizations with 20 or more employees.
- Requirements: Employers must offer the opportunity for a monthly pre-tax payroll deduction for transit or vanpool expenses.
- Penalties: A 90-day grace period to comply before penalties ($500 per month, per employer) are imposed. Employees must work at least 10 hours per week within the city to qualify.
Philadelphia, PA
- Effective Date: December 31, 2022
- Applicable to: Employers with 50 or more covered employees working an average of 30 hours or more per week in the past 12 months in Philadelphia.
- Requirements: Employers must provide at least one commuter benefit option: a pre-tax payroll deduction for fare or qualified bicycle expenses, an employer-paid benefit supplying a fare instrument, or a combination of both.
- Usage: Benefits can be used from January 2023, with financial benefits for organizations through reduced payroll taxes.
- Penalties: Non-compliance could result in penalties.
San Francisco Bay Area
- Launch Date: March 26, 2014
- Applicable to: All employers (private, public, or non-profit) with 50 or more full-time employees in the jurisdiction of the Bay Area Air Quality Management District.
- Objective: Reduce air pollution and traffic congestion by decreasing single-occupant commute trips, and provide tax savings for both employers and employees.
- Requirements: Employers must register on the program website and choose one of the following commuter benefit options:
- Option 1: Pre-tax benefit election, allowing employees to exclude their transit or vanpool costs from taxable income as per federal law.
- Option 2: Employer-provided subsidy (minimum $75 per month) covering the monthly cost of the employee’s commute.
- Option 3: Employer-provided transit such as a low-cost bus, shuttle, or vanpool service.
- Option 4: Alternative commuter benefit that effectively reduces single-occupant vehicle trips and/or emissions.
Washington D.C.
- Effective Date: January 1, 2016 (Penalties began on November 14, 2019)
- Applicable to: Employers with at least 20 employees in D.C.
- Requirements: Employers must offer at least one of the following benefits:
- Option 1: Employee-paid pre-tax benefit (including commuter bicycling costs from 2026).
- Option 2: Employer-paid direct benefit (transit pass or vanpool cost reimbursement).
- Option 3: Employer-provided transportation service at no cost to the employee.
- Penalties: Fines ranging from $100 to $800 per covered employee per month for non-compliance.
Berkeley and Richmond, California
Berkeley
- Effective Date: 2009
- Applicable to: Employers with 10 or more employees based in Berkeley or with offices located there.
- Requirements: Employers must offer a commuter benefit program with options such as a pre-tax plan, a transit subsidy, or an employer-provided shuttle service.
Richmond
- Effective Date: December 18, 2009
- Applicable to: Employers with ten or more employees working at least 10 hours per week in Richmond.
- Requirements: Employers must offer one of four options, similar to those mentioned in the San Francisco Bay Area section, including a pre-tax election, employer-paid benefit, employer-provided transit, or an approved alternative commuter benefit.
New Jersey
- Effective Date: March 1, 2020
- Applicable to: Employers with at least 20 employees (not in a collective bargaining agreement).
- Requirements: Employers must offer a pre-tax transportation fringe benefit.
- Penalties: A penalty between $100 and $250 for the first violation, with additional fines for continued non-compliance.
Philadelphia, PA
(As previously summarized)
- Effective Date: December 31, 2022
- Applicable to: Employers with 50 or more covered employees (working an average of 30 hours or more per week for the past 12 months in Philadelphia).
- Requirements: Offering at least one type of commuter benefit, including pre-tax payroll deductions for various commuting expenses or employer-paid benefits.
- Usage: Benefits become usable in January 2023, with financial benefits for organizations through reduced payroll taxes.
- Penalties: Non-compliance could result in penalties.
How can PrimePay help you offer commuter benefits?
- 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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