In 2018, the financial calculus has changed for organizations that want to help cover their employees’ commuting costs. For the last twenty-five years, US companies have been allowed to claim a business expense deduction for qualified transportation benefits offered to employees. Late last year, the Tax Cuts and Jobs Act repealed that deduction. Employees are still allowed to exclude employer-provided contributions for parking and transit passes from their taxable income, just as they could before. Employers, however, may no longer deduct those contributions. Many organizations are seizing the occasion of this rule change to revisit the commuter benefits programs they have in place for their employees. For companies in that position—and for those interested in starting a new program—we’ve put together a quick overview of what you need to know. Abacus does not provide tax advice. Please speak to a qualified professional about any tax accounting questions you have.
What is a commuter benefits program?
A commuter benefits program is provided by an employer to help their employees pay for the cost of transportation to work. Section 132 of the Internal Revenue Code recognizes qualified transportation benefits as one of the eight “fringe benefits” that employees may exclude from their pre-tax income. That reduces the taxable income of employees and the FICA (payroll) taxes employers must pay. Commuter benefits are valuable because employees cannot deduct the cost of commuting to work. Long ago the government decided that the nature and distance of an employee’s commute is determined by where the employee decides to live, which is a personal choice that shouldn’t earn a public subsidy. There are a few exceptions, such as occasions when the employee must commute to a temporary work site. But generally gas, mileage costs, and even transit passes are the employee’s to pay in full. That obligation opens up a great opportunity for businesses looking to offer the kind of perks that can attract top-tier employees. Qualified transportation benefits allow employees to commute for less than they would be able to on their own—and at some companies, for free. The IRS defines two types of commuter benefits:
- De minimis benefits refer to incidental transportation that you provide employees occasionally, but that are too insignificant to spend time tracking. If you sometimes reimburse employees for cabs home when they work late, that cab fare counts as a de minimis transportation benefit. It wouldn’t count towards employee income.
- Qualified transportation benefits are the focus of this article. They’re set up programmatically, provided regularly, and cover transit, parking, and certain highway commuting. In 2018, employees are allowed to exclude from their income:
- Up to $260/mo combined for public transit passes and shuttle/bus rides. (“Vanpooling,” as it’s known, must take place in a commuter highway vehicle with at least 7 seats.)
- Up to $260/mo for parking expenses.
If both of these circumstances apply—if someone pays for parking so they can hop on a commuter train, for example—employees are allowed to make full use of both exemptions. Whether the business chooses to contribute to both is a matter of internal policy.
Who pays for a commuter benefits program?
That brings us to the all-important question of whether the qualified transportation benefits are covered by the employee, the employer, or a combination. There are four options:
- Pre-tax withholding. At the employee’s request, the employer withholds part of the employee’s paycheck to let them pay transportation costs with pre-tax dollars. This is called a “compensation reduction plan.” According to the Association for Commuter Transportation, it is the most commonly offered variety of commuter benefits program.
- Employer subsidy. The employer provides funds directly to employees in addition to salary. Employees don’t count the designated transportation subsidy as taxable income—it’s going straight to transit/parking costs—so employers still don’t pay payroll taxes on it.
- Combination pre-tax and subsidy. The employer contributes some of the cost, and the rest is paid with the employee’s pre-tax withholding.
- Employer-provided. The employer can also provide parking and/or transportation directly. As long as the value doesn’t exceed the specified monthly limit, the employee can exclude this fringe benefit from income.
Those two factors—the specific commuter benefits that are offered and the source of their payment—will combine into whatever policy you end up creating. To connect them, ask two important questions: What do I need, and what do I want?
What commuter benefits do I need?
Adhere to local law
First off, some cities require you to offer commuter benefits programs. Here in New York City, for example, organizations with 20 or more employees must offer their employees at least a pre-tax withholding program. Rules like this also exist in Washington, DC and a few Bay Area cities. They're only a handful of locations for now, but with the deduction incentive newly repealed, it wouldn’t be surprising to see more municipalities follow suit and require businesses to offer commuter benefits.
Discover internal demands
A commuter benefits program that sees little usage not only wastes the resources you spent to set it up, but also deprives you of a lighter payroll tax obligation by not maximizing withholdings. Avoid this pitfall by surveying your employees to find out what they need. How are they getting to work? Where are they parking? Is their schedule being dictated or bottlenecked by a particular transit issue that a company solution could solve? All commuter policies cater to employees, after all, and effective ones solve the challenges they actually face.
Meet the labor market
If you’re a business fighting to attract top talent, commuter benefits might be table stakes as a workplace perk. Similarly, if you employ a workforce for whom a transportation subsidy would make a big difference in their productivity and engagement—or if it would create necessary access to your workplace—establishing that program is probably a wise decision.
What do I want in a commuter benefits program?
Determine your budget
How generous are you willing to be in paying for commuter benefits? For some businesses, giving employees the opportunity to electively withhold pre-tax transit dollars is all the policy you can afford. Conversely, if you’re part of a leadership team trying to find your company’s first marquee perk, subsidizing transportation is a great candidate.
Commit to one subsidy
If you decide to allocate some budget to commuter benefits, look at the results of your internal survey and see if there’s one place you can concentrate your spend. If your office is in an urban area where every employee uses public transit, you could simply buy bulk transit passes, let employees opt into the withholding program, and hand out the passes to whoever signs up. Or, if your employees drive to work, negotiate a block of spaces in a nearby garage and pay for them directly. Done properly, that counts as qualified parking.
Choose how to deliver the funds
Here’s a quick overview of some of the options you have for delivering transit funds to employees:
- Prepaid cards. Offered by many payroll providers, these programs issue debit cards to employees and contribute to the accounts only the amounts they specify (under the IRS maximum). They’re systemically inflexible and physically cumbersome—another card for employees to hold onto—but they also withhold funds reliably.
- Employee expenses. If you’re comfortable with your expense reporting system, you can use it to manage your commuter benefits. (If you’re not comfortable with it, take a look at Abacus.) Employees can pay for parking or transit costs themselves, then submit them through the expense workflow for recording and, if necessary, reimbursement. The data will be vivid and the system will be flexible, but you’ll also run into the familiar challenge of employees not submitting expenses on time.
- Payroll technology. Payroll software is usually more than happy to help you set up your employer-sponsored commuter benefits program. For non-full-time employees, there are innovative solutions like Alice, which uses machine learning to detect pre-tax eligible charges and adjust the next paycheck automatically.
When Congress first made transit passes tax-deductible in 1993, it was to incentivize taxpayers to use public transportation. (The parking deduction followed in 2016.) Even though those deductions are now gone, you can still encourage your employees to get to work in a healthier way. Why not reimburse them the costs of riding a bike to work? It’s not eligible for pre-tax spending, but it is a daily behavior that your policy can impact if you are so motivated.
Lastly, don’t limit yourself to IRS definitions of transportation. Get creative with how best to make the office accessible to your people. Help employees set up carpools to work. Launch an internal shuttle between office locations. Create a policy that encourages flexible schedules, remote work, even telepresence. There are many ways to get people working together aside from simply helping them pay for transportation.
Watch out for trickery
Ever since businesses lost the deduction for fringe benefits in December 2017, tax professionals have been cooking up ways to keep some of them around. One such scheme claims businesses can deduct parking costs by setting up a complex arrangement with parking garages and forwarding employee payments directly to them. Meanwhile, rideshare companies have been working with payroll companies to exploit a loophole in the vanpooling provision, by noting that large Uber Pool and Lyft Line vehicles qualify for pre-tax payment. These gimmicks may be fun, and with such a large technical correction surely coming from Congress, may continue to be overlooked by lawmakers. But fundamentally, commuter benefits are about providing employees a stable way to make an expensive fact of life a little easier. You’ll know your commuter benefits policy is finished when it defines who is paying for transit, how much they’re paying, and what the program covers. If the program proves successful, your finance team will be the home of a genuinely useful employee perk. Abacus does expense management, not tax advice. Please speak to a qualified professional about any tax accounting questions you have.