From the Hotline: Commuter Benefits Plans

Question:  To help with recruitment and retention, we’d like more information about commuter benefits.  Can you provide us with some information about how the plan works and how it benefits employees?

Answer: We’ll provide an outline below, and you can find more information in the federal IRS regulations under Section 132 dealing with commuter benefits plan regulations (Section 7, http://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf).

Depending on what you want to do, there are several options. You can either structure your own plan or work with a company that specializes in administering these programs for employers. If you perform an internet search, we are certain that you will come up with several service providers that would be happy to discuss your ideas and structure a plan to meet your needs.

Here are the basics of the IRS Section 132 rules for your information: The federal tax code allows employees to use pre-tax funds (through the employer’s Section 125 Cafeteria Plan) to pay for qualified work-related commuter and parking expenses (commute travel between home and worksite) with a commuter program sponsored by the employer. As the employer, you would have complete discretion as to how you structured your plan – although not an absolute requirement, we strongly recommend setting policies and documenting your plan so that it will be clear to the employees what type of benefit they are receiving.

Eligible Commuter Expenses: Only work-related eligible expenses can be reimbursed under the commuter benefits plan as defined by Internal Revenue Code Section 132 and the employer’s plan. Types of commute expenses that may be reimbursed include:

  1. Transit Expenses: Bus, subway, train, streetcar, ferry, commercial vanpool or commuter highway vehicle
  2. Parking Expenses: Parking at or near work, parking at or near transportation service site, park and ride expenses
  3. Bicycle Benefits (2008 Energy Ac): Employer reimbursement of up to $20 per month for reasonable expenses incurred by the employee for the purchase of a bicycle and bicycle improvements, repair, and storage if the bicycle is regularly used for travel between the employee’s residence and place of employment. The $20 amount is not indexed for inflation as are the other qualified transportation fringe benefits.
    1. A “qualified bicycle commuting month” is any month in which an employee:
      • Regularly uses a bicycle for a substantial portion of the travel between his residence and his place of employment, and
      • does not receive any other qualified transportation benefit for vanpool (commuter highway vehicle transportation), transit, and parking.
      • IMPORTANT: Unlike the other qualified transportation fringe benefits, a qualified bicycle commuting reimbursement benefit cannot be funded through employee pre-tax income.
  4. Expenses not included: Spouse/dependent transportation expenses

Companies can offer employees:

  • tax-free employer-paid subsidy
  • pre-tax employee-paid payroll deduction, or
  • combination of the above (shared employee- employer-paid)

Tax-exempt and pre-tax limits are set by the IRS. The following are the limits for the 2012 tax year:

  • $125 per employee per month for vanpool, bus, ferry, rail (all public transportation)
  • $240 per employee per month for qualified parking, or
  • $365 per month per employee for both public transportation and qualified parking.

When the employee pays part or all of the cost of public transportation via a pre-tax payroll deduction, the employee can set aside up to $125/month of pre-tax income. The employee saves federal withholding and FICA payroll taxes on the amount deducted. The employer saves paying FICA on the amount deducted. Employees may also share the cost with employers using after tax income. Pre-tax payroll deductions are referenced in the Internal Revenue Code, Section 132(F), as amended by TEA-21, Title IX, Section 910.

Please check with your tax advisor prior to launching your plan to ensure that you provide the best tax-advantaged plan for the company and your employees.