Employer-Provided Tax-Free Transit Benefits
Transit incentives are a popular transportation fringe benefit for many employees. Although the costs of commuting to and from work are not tax-deductible (except in certain relatively rare cases), transportation fringe benefits help to offset some of the costs, including the expenses of riding mass transit or taking a vanpool to work. Under current law, the value of qualified transportation fringe benefits provided to an employee is excluded from the employee's gross income and wages for income and payroll tax purposes.
Qualified benefits
Only certain transit benefits qualify for this special tax treatment. They are:
Transportation in a commuter highway vehicle if the transportation is in connection with travel between the employee's residence and place of employment (for example, vanpooling),
Transit passes,
Qualified parking, and
Qualified bicycle commuting reimbursements.
Employers have some latitude regarding which, if any, transit benefits they want to offer. An employer may simultaneously provide an employee with one or more of the first three qualified transportation fringes. However, an employee may not exclude a bicycle commuting reimbursement for any month in which he or she receives any of the other incentives.
Excluded from gross income
As long as the amount of the transit pass, qualified parking, or other benefit does not exceed the statutory monthly limits, the amounts are not wages for purposes of Social Security and Medicare, the Federal Unemployment Tax Act (FUTA), and federal income tax withholding. However, if the amounts do exceed the statutory limits, the excess must be included in the employee's gross income.
Amounts
For 2014, the maximum that may be excluded is $250 per month for qualified parking, but only $130 for transit passes and vanpooling. The exclusion for qualified bicycle commuting reimbursement is limited to a per-employee limitation of $20 per month multiplied by the number of qualified bicycle commuting months during the calendar year.
At the end of 2013, the monthly cap on the transit passes and vanpools of the commuter benefit dropped to $130 per month from $240 per month because transit benefits parity expired. The amount of qualified parking, however, increased to $250 per month, from $240 per month, because of an adjustment for inflation required under the Tax Code.
Pending legislation
Parity could be restored and made retroactive to January 1, 2014. In April, the Senate Finance Committee approved the EXPIRE Act, which would restore parity by increasing the transit pass and vanpool benefits to $250 per month - the same amount as parking. The EXPIRE Act is not a permanent fix. The bill would extend parity through the end of 2015. On January 1, 2016, parity would again expire.
The EXPIRE Act also includes special treatment for bike-share costs. In 2013, the IRS announced that bike-share arrangements would not be treated as a transportation fringe benefit unless Congress makes them so. The EXPIRE Act modifies the definition of qualified bicycle commuting reimbursement to include expenses associated with the use of a bike-sharing arrangement.
Both the House and Senate must pass legislation in order to extend transit benefits parity. At this time, transit benefits parity has not moved in the House. One deterrent is the cost of extending parity. According to the Joint Committee on Taxation, a two-year extension of parity (through 2015) would cost $180 million over 10 years.
Retroactive extension
Retroactive extension of transit benefit parity would create some administrative challenges for employers. The last time there was a retroactive extension, the IRS provided special guidance to employers on how to account for the retroactive change when filing employment tax returns and Forms W-2. The IRS would likely do the same if there is a retroactive extension of transit benefit parity to January 1, 2014.
Please contact our office if you have any questions about transportation fringe benefits. Our office will keep you posted on developments.
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