Transit Commute Benefit
Summary of Transit Commute Benefit Program
On June 9, 1998, President Clinton signed the Transportation Equity Act for the 21st Century (TEA-21) into law. In addition to re-authorizing the transit and highway programs through fiscal year 2003, it made several changes to the Internal Revenue Code (IRC), including a provision found in Section 9010 affecting the transit and vanpool benefits which are considered qualified transportation fringe benefits under 26 USC 132(f).
Prior to passage of TEA-21, the IRC allowed employers to only provide transit or vanpoool benefitsin addition to, and not in lieu of compensation. Under the changes made by TEA-21, effective during tax years beginning after December 31, 1997, employers may continue to provide these benefits in addition to current compensation paid to their workers or, for the first time, in lieu of their existing compensation. This gives transit and vanpool benefits the same tax treatment as parking benefits were given under the Taxpayer Relief Act of 1997. These benefits are not, however, permitted to be part of "cafeteria" plans or flexible spending accounts established by employers on behalf of employees.
Additionally, the limit on nontaxable transit and vanpool benefits is increased from $65 to $100 per month for taxable years beginning after December 31, 2001. All benefits remain indexed for inflation; however, the indexing mechanism is suspended during the taxable year beginning after December 31, 1998. Therefore, transit and vanpool benefits will remain at $65 per month and parking will remain at $175 per month for calendar years 1998 and 1999. The indexing mechanism will resume for taxable years beginning after December 31, 1999.
As a result of TEA-21 and the Taxpayer Relief Act of 1997, transit and vanpool qualified transportation fringe benefits can now be used as follows:
Benefits in Addition to Compensation
Employers may give their employees up to $65 per month in benefits to commute to work by transit or by eligible vanpools. The employer pays for the benefit and receives an equivalent deduction from his business income taxes. Employees receive the benefit completely free of all payroll and income taxes, in addition to their current compensation.
Benefits in Lieu of Compensation
Employers may permit their employees to set aside some of their pre-tax income to pay for transit or eligible vanpools. Employers do not pay for the benefit but permit employees to use some of their gross income to pay for commuting expenses, before taxes are computed, up to $65 per month. Employees save on payroll and income taxes on the amount of the benefit they purchase, since that amount is no longer treated or reported as taxable salary. Employers payroll costs are reduced since payroll taxes do not apply to the set aside amount since it is treated as a benefit.
Employers may share the cost of commuting with their employees. Employers can give their employees part of the commuting expense tax-free in addition to their compensation and allow the employees to set aside part of their gross income (in lieu of compensation) to pay the remaining amount, up to the total monthly limit of $65. For example, the employer could provide the employee a transit pass worth $35 in addition to salary and the employee could use pre-tax income that is set aside to purchase a pass for $30, for a total monthly benefit of $65. The employer receives an equivalent deduction from its business income taxes while the employee saves on payroll and income taxes on the set aside amount for the balance of the benefit.
Parking Cash Out
Employers may establish a parking cash out program whereby employees may choose to cash out the value of employer-provided parking, forego parking, and receive the taxable cash value of the parking, or receive a tax-free transit or eligible vanpool benefit up to $65 per month. The employer transfers its expenditure for the parking space, assuming it is leased, to a direct payment to the employee. If the employee accepts the cash value rather than a tax-free transit or vanpool benefit, then the employee also incurs payroll and income taxes on the amount. The employer only incurs payroll taxes on the cash value provided. This additional compensation will allow the employee to finance other commuting modes that are not considered qualified transportation fringe benefits, such as walking, bicycling, carpooling, rollerblading, or other means of commuting to work.
Please encourage your constituents, membership, and customers to take advantage of these changes to the IRC. Providing transit benefits in lieu of salary will not increase costs to employers; it will actually reduce their payroll costs since payroll taxes do not apply to these benefits amounts. Additionally, by improving and making employee benefits more flexible, employers will improve their ability to attract and retain highly motivated and well-qualified employees to meet the challenges that lie ahead as we enter the twenty-first century.
Additional information can be obtained via the Internet from the American Public Transportation Association at www.apta.com. The Federal Transit Administration provides an extensive list of materials under the heading "Commuter Choice" at www.fta.dot.gov, and the Internal Revenue Service provides guidance under the heading "commute benefit" at www.irs.ustreas.gov. The pertinent law can be found in Section~ 132 in the Internal Revenue Code, Title 26 of the United States Code, as modified by the Taxpayer Relief Act of 1997 and the Transportation Equity Act for the 21st Century. IRS Publication 535 also explains the law.