Robert W Ditmer Financial Support

Transportation Fringe Benefits -
Helping Employees Get to Work

 

SPECIAL NOTE! The following article was originally prepared and published in 2015. Some provisions of the Internal Revenue Code governing transportation fringe benefits were modified by the Tax Act of 2017 (P.L. 115-97) for tax years beginning after December 31, 2017. The two most important changes were the following:

 

• Qualified bicycle commuting reimbursements can no longer be excluded from an employee's wages.
   

• Although employers can exclude other transportation fringe benefits from an employee's wages, the employer can no longer deduct the reimbursements as a business expense.

 

So as you read this article, please keep in mind the above changes to the tax law. And be sure to check IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, for the amounts that can be excluded from wages.

 

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In 1992 the Energy Policy Act included an amendment to Section 132(f) of the Internal Revenue Code. This amendment made it possible for employers to provide certain commuting benefits for employees. Certain amounts could be excluded from an employee's income for commuting in a "commuter highway vehicle," using a "mass transit pass" for public transportation, or for parking near the employee's place of business.

 

In December 2000 the Internal Revenue Service issued final regulations regarding Qualified Transportation Fringe Benefits. However, since then the regulations have been amended several times, and Congress has expanded the benefit, so this article will discuss the current rules in light of recent changes.

 

How Can an Employee Receive Qualified Transportation Fringe Benefits?

 

According to IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, the general rule regarding fringe benefits provided to employees is that all fringe benefits are taxable to the recipient based on the fair market value (FMV), but the FMV may be reduced by any amount that the law excludes from compensation and any amount that the recipient pays for the benefit.

 

IRS Publication 15-B states that the following transportation benefits may be excluded from income:

 

• A ride in a commuter highway vehicle between the employee's home and work place.

• A transit pass.

• Qualified parking.

• Qualified bicycle commuting reimbursement.

 

So how are each of these benefits defined?

 

Commuter Highway Vehicle

 

According the IRS Publication 15-B a commuter highway vehicle is any vehicle that seats at least 6 adults, not including the driver. The vehicle must be used to transport employees between their homes and work at least 80% of its use, and at least half of the seats must be occupied. (This restriction is referred to as the 80/50 rule.)

 

There is nothing in the regulations that state that all of the employees being transported in the vehicle work for the same employer. Although the cost of ride sharing or a commuting pool normally cannot be excluded from income, such arrangements can be treated as non-taxable reimbursement if the vehicle involved meets the definition of a commuter highway vehicle. Of course, the owner of the vehicle must be able to attest that he uses the vehicle for personal use less than 20% of the time. This may necessitate the use of mileage logs in order to substantiate classifying the vehicle as a commuter highway vehicle.

 

This issue was recently addressed in an IRS Information Letter dated September 26, 2014. (IL 2014-0028) In that letter the IRS stated that employee-owned van pools in which the vehicle meets the 80/50 rule qualify as a commuter highway vehicle, and reimbursements to employees for costs related to commuting in such a vehicle qualify for tax-free status.

 

Transit Pass

 

A transit pass is broadly defined as "any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate," on either mass transit (including any publicly or privately operated bus, rail, or ferry) or in a vehicle that seats at least 6 adults (not including the driver) that is used in the business of transporting persons for hire.

 

Since the law was instituted in 2000, the regulations regarding reimbursements for transit passes have changed a number of times. The whole issue revolves around whether or not payments made by employers are actually used to purchase transit passes. So employers may provide qualified transit passes on a tax-free basis in one of the following ways:

 

• Purchase the transit pass from the local transit authority and give it to the employee,

• Provide a smart card or debit card that has a specific value not in excess of the limit that can only be used to purchase a transit pass,

• Reimburse the employee who presents an unused transit pass that he has purchased at the beginning of the month and certifies that he will use it during the following month for commuting to and from work, or

• Reimburse the employee who presents a used transit pass that he has purchased at the end of the month and certifies that he has used it for commuting to and from work.

 

For more information on the use of smart cards and debit cards, refer to IRS Revenue Ruling 2006-57.

 

Qualified Parking

 

This is defined as parking that the employer provides for its employees on or near the business premises. This does not mean that the employer has to actually operate the parking facility. If the employer pays for the parking, either by paying the parking facility directly or by reimbursing the employee, then the employer is defined as providing the parking.

 

Parking at or near the location from which an employee commutes to working using mass transit also qualifies. For instance, an employee may park in a commuter parking lot and catch the train to work. In that case, both the cost of parking and the mass transit could be qualified transportation benefits. However, parking at or near the employee's home (where the vehicle is garaged overnight) does not qualify.

 

Bicycle Commuting

 

The Emergency Economic Stabilization Act of 2008 added a new transportation benefit beginning in 2009. If an employee regularly uses his bicycle to commute to and from work during a calendar month and does not receive any other transportation benefits, that month may be defined as a qualified bicycle commuting month.

 

Employers are obligated to verify two facts: (1) the employee used his bicycle regularly to commute to and from work, and (2) the employee has actually incurred qualified costs related to his use of a bicycle to commute. The regulations do not define the word "regularly", so employers must determine how many days a week is considered to be "regular." For instance, if an employee cycles to work on average 3 out of 5 business days each week, then he is defined as a "regular" bicycle commuter. In addition, employees have to provide some kind of documentation to show which days they cycled to and from work.

 

Since bicycle commuting benefits cannot be substituted for pay, they must be added to an employee's paycheck as a reimbursement. Employers can choose to reimburse an employee up to $20 a month based on receipts provided by the employee, or the employer may issue $20 vouchers that can only be redeemed at specific locations such as bicycle shops.

 

The benefit is actually an annual benefit based on the number of qualified bicycle commuting months multiplied by $20. It reimburses the employee for reasonable fixed expenses, including the purchase of a bicycle, bicycle improvements, repairs, helmet, bike lock, and storage.

 

Reimbursements can be made during the 15-month period beginning on January 1 of the benefit year for expenses incurred during the calendar year. For instance, reimbursements made through March 31, 2016, may be made for expenses incurred in 2014.

 

For instance, suppose that the employee purchases a new bicycle for $160 in June 2015 and begins cycling to work in July 2015. As long as each month through February 2016 (8 months) qualifies as a qualified bicycle commuting month, the employee may be reimbursed $20 each month toward the purchase of that bicycle (8 x $20 = $160).

 

How Does an Employer Provide These Benefits?

 

These benefits may be provided to the employee in the following ways:

 

• The benefit may be provided to the employee as an additional non-taxable benefit.

• The employee may be reimbursed for the benefit.

• The benefit (except for bicycle commuting) may be substituted for pay.

 

In the first method the benefit is simply provided as an additional fringe benefit. As long as the total value each month is not in excess of the limits, the provision of the benefit does not impact the employee's paycheck.

 

When an employee must pay for transportation in a commuter highway vehicle, a transit pass, or parking, the employee may be reimbursed for the benefit. Any reimbursements in excess of the limits must be added to the employee's compensation, and they are subject to income tax withholding. Qualified bicycle commuting expenses are usually reimbursed since they cannot be substituted for pay.

 

Qualified transportation fringe benefits may be substituted for pay in two ways. If any employee is paid a salary, then the employee's salary may be reduced by the amount of the fringe benefit. On the other hand, the benefit may be deducted from an employee's paycheck on a pre-tax basis. However, caution is in order to guarantee that the employee is still paid minimum wage after the benefit has been deducted from his gross wages.

 

How Much Are the Benefit Exclusions?

 

Every October the IRS publishes the limits on qualified transportation fringe benefits for the following calendar year. In 2015 the limits are as follows:

 

• $130 per month for any combination of commuting in a commuter highway vehicle and transit passes.

• $250 per month for qualified parking.

• $20 for each qualified bicycle commuting month.

 

Unfortunately, this is where it gets complicated. Prior to 2009 the exclusion for parking was always approximately twice the transit benefit, but effective in 2009 Congress passed legislation creating parity between the two benefits so the exclusion amounts were the same. However, these provisions expired at the end of 2013, so the transit pass benefit was reduced for 2014. But on December 19, 2014, Congress reinstated parity retroactively to January 1, 2014, but only for calendar year 2014.

 

This means that employers who provided transit benefits in excess of the $130 limit in 2014 and taxed employees for the amounts in excess of the exclusion, can now retroactively reimburse employees for any excess FICA tax withheld. In addition, employers can reduce their FICA liability as well. The procedures for doing so are outlined in Internal Revenue Bulletin 2015-4, Notice 2015-2, p. 334.

 

Employers in 2015 are faced with the same situation. Although Revenue Procedure 14-61 established the limits noted above for 2015, the Commuter Benefit Parity Act of 2015 was introduced in the House of Representatives on February 13, 2015. If passed, this Act would establish parity on a permanent basis beginning with the 2015 calendar year. The benefit limit for transit passes and commuting in a commuter highway vehicle would be the same as the parking benefit, $250 in 2015.

 

In anticipation of parity being legally established for 2015, employers may choose to provide the higher benefit. However, until the bill is actually passed, employers would still be required to withhold taxes on any benefit in excess of the current limits. Those taxes would be reimbursable to the employee if the legislation is passed. But one important point must be kept in mind: Employers cannot make the benefit retroactive. The only thing that will be retroactive will be the non-taxability of any benefit already in place in excess of $130 per month.

 

Providing Qualified Transportation Fringe Benefits Can Benefit Employees and Employers

 

Over the last 25 years there has been a trend to encourage the use of mass transit in order to reduce congestion and pollution. Commuting benefits encourage employees to use public transportation, but they also save both employees and employers money. Since these are tax-free benefits, employees save money on taxes, and employers save money on taxes because they don't have to pay matching FICA taxes, unemployment taxes, or workers compensation insurance on the compensation.

 

In some urban localities employers are now required to provide these benefits to commuters, so the above discussion should help employers to gain a basic understanding of how they can assist employees get to work and at the same time save money.