Question: What compliance issues should employers be aware of if they want to add a commuter benefit subsidy?
Compliance Team Response:
General Tax-Advantaged Status of Qualified Transportation Plans Under IRC §132(f)
IRC §132(f) provides a tax-advantaged limit of $265 per month that may be contributed to a transit pass/vanpooling and/or parking commuter benefit program. This $265/month limit applies for 2019 and is adjusted annually for inflation.
Both employer and employee contributions count toward the $265 limit. This means that the availability of any employee pre-tax contributions will be reduced by the amount of tax-free employer contributions.
For example, if an employer provides a mass transit/vanpooling or parking subsidy of $100 per month, the employee can contribute on a pre-tax basis the remaining $165 per month to each benefit. Any employee contributions in excess of $165 would be made on an after-tax basis (if permitted by the employer’s commuter benefit program).
IRS Prohibition of Direct Employer Reimbursement for Tax-Free Transit Expenses
There has been a long-standing rule that cash reimbursement for transit passes is permitted under §132 as a non-taxable qualified transportation plan only if a voucher (or similar item which may be exchanged only for a transit pass) is not “readily available” in that area. This readily available test became extremely complex over time as the IRS issued numerous rulings attempting to define “readily available.”
A few years ago, the IRS determined that vouchers (including terminal-restricted debit cards) have become readily available throughout the country, and therefore that they won’t allow cash reimbursement anymore where terminal-restricted debit cards are readily available (basically everywhere). This rule took effect 1/1/16. We have a summary of the guidance here.
The short version is that employer reimbursement of transit expenses on a non-taxable basis through §132 is now prohibited. Therefore, employers must generally must provide §132 non-taxable mass transit benefits through an FSA debit card, or through old-fashioned commuter checks.
If the IRS were to discover the cash reimbursement approach, it could recharacterize all reimbursements as taxable income to employees.
Bay Area Commuter Benefits Program
The Bay Area Commuter Benefits Program requires employers with at least 50 full-time employees in the Bay Area to provide one of the following to Bay Area employees work at least 20 hours per week:
- Allow employees to contribute pre-tax for their mass transit expenses (up to the statutory limit) either through an FSA with debit card or old-fashioned commuter checks;
- Provide an employer subsidy of at least $75/month (2019 limit adjusted for inflation) toward employees’ mass transit expenses either through an FSA with debit card or old-fashioned commuter checks;
- Provide a free or low-cost bus, shuttle, or vanpool sponsored by the employer (e.g., Google or Facebook bus); or
- Submit for approval an alternative approach that is as effective at reducing single occupant vehicles as the above options.
The employer must register at 511.org and annually re-certify compliance with the program.
Employers should comply to avoid potential penalties that can range from $1,000 to $10,000 per day. The Bay Area Air Quality Management District, which has enforcement authority over the Bay Area Commuter Benefits Program, states that the focus of the Program is to “achieve voluntary compliance by employers by providing education and compliance assistance to employers,” and “[t]he penalty for failure to comply would be determined on a case-by-case basis….”
We have full details on the Bay Area Commuter Benefits Program available here: https://theabdteam.com/blog/bay-area-commuter-benefits-program/
NYC Commuter Benefits Law
The New York City Commuter Benefits Law applies to employers with at 20 or more full-time employees working in New York City. Any such employers must permit the NYC full-time employees to contribute the maximum permitted ($265/month in 2019) pre-tax to a commuter benefits program.
Employers may provide the full maximum as an alternative to permitting the employees to contribute on a pre-tax basis. However, if an employer provides only part of the maximum (e.g., $100/month), it must permit employees to contribute the balance on a pre-tax basis (e.g., $165/month).
The potential penalties are $100 to $250 for the first violation. Additional fines of $250 may be assessed for every additional 30-day period of noncompliance.
IRS Revenue Procedure 2018-57:
.18 Qualified Transportation Fringe Benefit. For taxable years beginning in 2019, the monthly limitation under § 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $265. The monthly limitation under § 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $265.
IRS Revenue Ruling 2014-32:
Accordingly, the provision included in Rev. Rul. 2006-57 permitting employers to use cash reimbursement if the only available voucher or similar item is a terminal-restricted debit card is no longer warranted. Beginning after December 31, 2015, in order to provide time for employers to comply, employers are no longer permitted to provide qualified transportation fringe benefits in the form of cash reimbursement in geographic areas where a terminal-restricted debit card is readily available.
Situation 8. Beginning after December 31, 2015, the value of the transit benefits provided by H to its employees through a cash reimbursement arrangement is not excluded from gross income under § 132(a)(5) and is wages for employment tax purposes.
Bay Area Commuter Benefit Program Options
What are my options?
- Option 1 — Allow employees to exclude their transit or vanpool costs from taxable income, to the maximum amount, as allowed by federal law (currently $265 per month).
- Option 2 — Employer-provided transit or vanpool subsidy (or transit pass) which covers the monthly cost of the employee’s commute (up to $75 per month).
- Option 3 — Employer-provided free or low cost bus, shuttle or vanpool service operated by or for the employer.
- Option 4 — An alternative employer-provided commuter benefit that is as effective as in reducing single occupant vehicles as Options 1-3.
View Option 4 Guide
New York City Commuter Benefit Law FAQ
Which employers must offer commuter benefits?
Generally, non-government employers with 20 or more full-time non-union employees working in New York City must offer their full-time employees the opportunity to use pre-tax income to pay for their transportation by public or privately owned mass transit or in a commuter highway vehicle.
What if an employer already provides employees with a transit pass at its own expense?
An employer does not need to offer commuter benefits under NYC’s Commuter Benefits Law if it already provides to employees, at its expense, a transit pass for transportation on every mode of eligible public or privately owned mass transit. However, if the value of the employer-provided transit pass is less than the maximum dollar amount allowed under federal law for pre-tax purchases of qualified transportation fringe benefits, then the employer must offer employees the opportunity to make up the difference with additional pre-tax payroll income.
Employers who provide employees with a transit pass at their own expense must comply with the Commuter Benefits Law recordkeeping requirements.
May an employer provide cash reimbursements to employees participating in a commuter benefits program?
Generally, no. The Internal Revenue Service (IRS) announced new restrictions, effective January 1, 2016, on employers providing qualified transportation fringe benefits in the form of cash reimbursement in geographic areas where terminal-restricted debit cards or transit passes are “readily available.” For more information, employers should consult with their accountant or tax professional to ensure compliance with all applicable requirements and restrictions. For guidance on the federal tax code, please see the IRS Employer’s Tax Guide to Fringe Benefits or contact the IRS.
What are the maximum penalties under the law?
Employers can be fined $100 to $250 for the first violation of the law if they do not cure the violation within 90 days. If the violation is not cured after the first fine is imposed, an additional fine of $250 may be issued after every additional 30-day period of noncompliance.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).