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Employer Benefits Through Transit
- Save Money
- Increase Productivity and Employee Satisfaction
- Reduce Traffic and Pollution
Today’s employers are taking advantage of new federal tax laws that give employees valuable new benefits while offering tax savings to businesses! Here are the highlights of why you should consider making transit your newest company benefit!
The federal tax code provides incentives for employers to offer commuter benefits to employees. Under tax law, an employer may offer one or more options from a menu of commuter benefits, including:
- A tax-free employer-paid commuter benefit for riding transit or vanpooling;
- A pre-tax commuter benefits program in which employers are allowed to reserve income for transit or vanpooling on a pre-tax basis; or
- A parking cash-out program, in which employees are given the option of accepting taxable income (or tax-free transit and vanpool benefits) in lieu of a free or subsidized parking space at work.
Employees can participate in commuter benefits programs only if offered by their employer.
Federal tax law allows employers to provide tax-free transit, vanpool, or parking benefits to employees. These benefits are known as qualified transportation fringe benefits, and the section of tax law that describes them in Internal Revenue Code (IRC) Section 132 (f).ii In contrast to taxable salary, the employer and employee pay no federal income or payroll taxes on these benefits.
Transit/vanpool benefits may be offered either in addition to, or in lieu of, salary. Employers have three options of how to provide the benefit. See Table 1.
TABLE 1
Tax savings for employers and employees
| Option |
Employer Tax Benefit |
Employee Tax Benefit |
| Employer-Paid: Employer provides employees with up to $100/month to commute via transit or vanpools. |
Employer pays no payroll taxes on the value of the benefit, making providing this benefit cheaper than
providing a comparable salary increase. |
Employee receives up to $100/month tax-free to commute via transit or
vanpool. The employee does not pay any taxes on the value of the benefit. |
| Employee Pre-Tax Deductions: Employer allows employees to reserve up to $100/month in pre-tax income to pay for transit or vanpools. |
Employer pays no payroll taxes on the income that is reserved by the employee. |
Employee saves on income tax, payroll tax, and possibly state tax. The amount of the benefit is no longer treated as taxable salary. |
| Employee, Employer Share Costs: Employers pay transit or vanpool costs up to a certain limit and the employee pays for the remainder of the costs through a pre-tax deduction. Total employer and employee paid costs cannot exceed the monthly limits of $100/month for transit and vanpool. |
For the employer-paid portion, employer pays no payroll taxes, making providing this benefit cheaper than providing a comparable salary increase. Employer saves payroll taxes on the portion of the benefit paid by the employee through pre-tax deduction. |
Employee does not pay taxes on the portion of the benefit provided by the employer. Additionally, the employee saves on income tax and payroll taxes by taking a pre-tax deduction to pay for the remainder of his/her commuting costs. |
Section 125 Versus Section 132 Benefits Plans
Commuter benefit programs operate under a separate section of the IRC – Section 132 – than most other pre-tax benefit programs with which employers are familiar. Medical savings accounts and other employee benefit plans are covered by Section 125 of the IRC.
Section 132 plans are far more flexible than Section 125 plans. For employers who are accustomed to managing Section 125 plans, the different regulations for Section 132 plans may be a source of confusion because the two plans operate under distinctly different set of rules, and employers cannot combine them. The differences in how the plans operate are outline in Table 2.
TABLE 2
Comparison of Section 125 and Section 132 benefits plans
| Characteristic |
Section 125 Plans |
Section 132 Plans |
| Enrollment period |
Must be annual |
Determined by employer |
| Reimbursement period |
Employee can be reimbursed the fullamount of one year’s reserved income at any time during the year. |
Employee can be reimbursed only the amount that has been reserved within a given period. |
| Distribution of pre-tax income remaining at end of enrollment period. |
Employee forfeits money (commonly known as “use-it-or-lose-it”). |
No “use-it-or-lose-it” provision |
| Employee eligibility |
Must meet nondiscrimination test |
May be made available to any employeeor groups of employees |
| Reporting requirements |
Annual reporting required |
No reporting requirements |
| Plan documentation |
Written plan documentation required |
No written plan documentation required |
One-Percent Rule
"The One-Percent Rule takes effect on January 1, 2004. Employers who are currently using cash reimbursement will have to change to a voucher or pass program in 2004 if the vouchers or passes are "readily available." The purpose of the new "readily available" definition was to encourage the use of vouchers and passes and to reduce the potential for tax fraud.
i Transit Cooperative Research Program, Report 87, Chapter 2.
ii The Internal Revenue Code is found in Title 26 of the United States Code (USC).
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