A Year End Review of the Commuter Tax Benefit
As the year winds down, it’s a good time to remind TDM professionals of an important benefit program that continues to provide a major incentive to use transit, vanpools and even carpools. The commuter tax benefit, referred to technically as the Qualified Transportation Fringe, Internal Revenue Code Section 132(f), gives commuters a substantial tax break. What has caught the attention of many is that the benefit will increase to $300 a month starting on January 1. Here’s a quick overview of the tax break.
The commuter tax benefit is an employer-provided, tax-free benefit. It is available to employees who commute to work by any type of transit or vanpools (technically called commuter highway vehicles). The benefit can be offered, pre-tax, as a subsidy or a combination. Many employers offer the pre-tax version as it is paid for with an employee’s salary before taxes saving the employee payroll related taxes which can be as high as 30% or more. Originally, the benefit was only available as a tax-free subsidy before the pre-tax option was added in 1998, and accounts for a smaller percentage of employer programs. Some employers do contribute a small subsidy to their employees letting the employees cover any remaining eligible expenses through a pre-tax deduction.
Transit services include any form of rail service including light rail and commuter rail, local and express buses, bus rapid transit, ferries, shuttles and even cable cars and funiculars! The law also covers expenses for riding in a shared-ride vehicle if the vehicle accommodates at least 6 passengers plus a drive and is operated by a transportation provider. That means on-demand vans and buses operated by for-profit companies are eligible. Vanpools are covered provided the vehicles allows for at least 6 passengers plus the driver, is on average one-half filled and 80% of its mileage is for commuting.
Commuter parking (called Qualified Parking) is also eligible. While this component was a necessary evil to secure the passage of the original statute in 1993, it not only covers parking at or near an employee’s workplace but at park-n-rides including train stations and at locations from which employees commute to work in carpools. This is the only aspect of the benefit that includes carpooling.
A bicycle benefit had been added to the law in 2009 that allowed employees to receive a $20 monthly subsidy for expenses related to bicycle commuting, but the 2017 Tax Cuts and Jobs Act put this provision on hold until 2026, presumably to help offset the costs of the tax cuts.
Finally, the benefit is very flexible. It is quite different from other pre-tax benefits like FSA/HSA and 401(k) programs. There are no set enrollment periods, employees can enroll at any time during the year. There are no “use it or lose it” rules. The amount in an employee’s account remains available until it is used up or the employee leaves the company. Employees can change their monthly contributions if the employer allows or suspend contributions for a time without any impact on its use at a future time. Employees do not have to commute regularly by the mode for which they have set aside their monies.
A good and much more detailed reference is available from the Best Workplaces for Commuters at https://bestworkplaces.org/resource-center/faq-on-qualified-transportation-fringe-benefits
So as TDM professionals look to refresh their programs for the new year, it’s a good time to consider promoting the use of the commuter tax benefit.