A qualified transportation plan allows employees to receive transportation fringe benefits on a tax-free basis under section 132 of the Internal Revenue Code. The permissible transportation fringe benefits are qualified parking, transit passes, vanpooling and bicycle commuting. Set forth below is an overview of qualified transportation plans with special emphasis on qualified parking and transit passes. Local ordinances requiring employers to offer transportation benefits are also discussed.
General Information
A qualified transportation plan may be paid by the employer, by employees through a pre-tax compensation reduction plan (not available for bicycle commuting expenses), or by a combination of both. While the pre-tax compensation reduction plan is similar to a section 125 cafeteria plan, it is separate and distinct because section 132 fringe benefits may not be offered under a cafeteria plan. For 2016, the monthly limits are $255 for qualified parking, $255 for transit passes and vanpooling combined and $20 for bicycle commuting expenses.
A written plan document is not required to establish a qualified transportation plan; however, an employer should document plan design choices, operating rules and limits especially when employer contributions are involved. While a qualified transportation plan can be administered inhouse, many employers choose to use a third party administrator.
Qualified parking includes parking provided to an employee at or near the business premises of the employer and parking provided to an employee at or near a location from which the employee commutes to work. Qualified parking expenses may be paid directly to the parking facility or by reimbursement to the employee.
Transit passes include any pass, token, fare card, voucher, or similar item that provides for transportation on mass transit facilities or by any person in the business of transporting persons for compensation or hire (if provided in a highway vehicle with a seating capacity of at least six adults). Cash reimbursement for transit passes is only permitted if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.
Compensation Reduction Agreement
For a pre-tax compensation reduction plan, the compensation reduction agreement must be in writing or through electronic media and be made both before the cash compensation is available and before the period for which the benefit is being provided. In addition, the agreement must include the date made, the amount of compensation to be reduced each month (cannot exceed the monthly limits), and the period for which the transportation benefit will be provided.
The election made in the compensation reduction agreement must be irrevocable for a specified period; however, the coverage period may be very short. Most employers allow employees to change their elections monthly. Current employees are permitted to carry over unused amounts to subsequent months, as long as the amounts are used solely for qualified transportation expenses. However, reimbursements for any calendar month cannot exceed the monthly limit. Employees who terminate forfeit unused balances. Under no circumstances may employees get their compensation reduction amounts back in cash.
Readily Available Test for Transit Passes
An employer cannot reimburse employees for transit pass expenses they purchase on their own if the employer can directly purchase transit passes (such as smartcards and terminal-restricted debit cards) or vouchers that can be exchanged for transit passes. There is an exception if the vouchers are subject to certain financial restrictions (excessive fare media charges) or non-financial restrictions (such as unreasonable terms to purchase vouchers).
Local Ordinances
Several environment-friendly municipalities have passed laws requiring employers in their jurisdiction to offer a qualified transportation plan. As of September 30, 2014, San Francisco Bay Area employers with 50 or more full-time employees within the Bay Area Air Quality Management District geographic boundaries are required to register and offer commuter benefits to their employees who work 20 or more hours per week under the Bay Area Commuter Benefits Program. Registration information must be updated on an annual basis.
Effective January 1, 2016, employers in the District of Columbia with 20 or more employees who work in DC at least 50% of the time must offer commuter benefits to their employees under the Sustainable DC Omnibus Amendment Act. The mayor of DC has the authority to extend the law to include employers with less than 20 employees beginning in 2017.
For both of these programs, employers must offer one of the following options to their employees:
pre-tax compensation reduction plan for transit passes or vanpool costs;
employer-provided transit subsidy (or transit pass) or vanpool subsidy; or
Free bus, shuttle or vanpool service operated by or for the employer.
Also as of January 1, 2016, employers with 20 or more full-time non-union employees in New York City are required to offer commuter benefits to all full-time employees who have any hours of service in New York City through a pre-tax compensation reduction plan or an employer-paid benefit for certain transportation expenses. The Mass Transit Benefit Law requires that employers offer employees the opportunity to obtain tax-free benefits for all eligible public or privately owned mass transit (including subway, bus, and ferry) or in a commuter highway vehicle with a seating capacity of six or more passengers. The law provides employers with a six-month grace period (from January 1, 2016 until July 1, 2016). After July 1, 2016, employers will have an opportunity to correct any violation of the law within 90 days before any penalty may be imposed.
Qualified parking may be offered under a pre-tax compensation reduction plan, but will not satisfy the requirements of these local ordinances. These programs are intended to promote the use of alternative commute modes such as transit, ridesharing, bicycling, and walking, to decrease motor vehicle travel and traffic congestion, and to reduce emissions of greenhouse gases and other air pollutants, while providing a tax-free benefit to employees.
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