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.
$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.
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.
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!
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!