For many people, transportation costs related to getting to work and back are not comparable to their healthcare costs. However, fuel costs, vehicle maintenance, parking fees, transit fares, and other associated expenses can still be a significant expenditure. To ease this financial burden for America’s workers, the IRS created a way for commuters to save money in order to pay for some of these work-related costs. Commuter benefits have become a staple in many employer benefits plans, especially in major metropolitan areas throughout the United States.
In 1984, Congress sought a remedy to offset the cost of commuting to and from work. Now over three decades later, the executive and legislative branches of the federal government continue to help commuters and employers. With the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, American workers could enjoy greater tax advantages on commuter benefits.
What are Commuter Benefits?
The formal designation for federal commuter benefits is the “Qualified Transportation Fringe Benefit.” It consists of a voluntary benefit program, regulated by IRS Code Section 132(f), that allows employers to provide pre-tax transportation benefits to their employees. It is one of eight types of tax-free employee benefits that would otherwise be subject to federal tax.
Under a commuter benefits program, employees can pay for qualified transportation expenses with pre-tax income. Qualified expenses include:
- Riding in a commuter highway vehicle (vanpool) between the employee’s home and place of employment
- Transit passes
- Qualified parking
These qualified commuter benefit expenses offer tax advantages to employers and their employees. Employers do not have to include them as part of an employee’s wages when calculating payroll taxes. Meanwhile, the expenses are excluded from an employee’s gross income for income tax purposes.
How do Commuter Benefits Work?
The commuter benefits tax break can only be offered as part of an employer benefits plan. The benefits can be managed in one of three ways:
- Employers pay for an employee’s transit, vanpool, or parking expenses. In return, the employer receives a tax deduction for the amount up to the monthly limit for each commuter.
- Employees pay for their commuter expenses with pre-tax income deducted from their paychecks. They pay no taxes on the deductions, and the employer benefits from lower payroll taxes.
- The employer and employee share the costs by combining options one and two.
Refer to the following commuter benefits chart, which comes from IRS Section 132(a), regarding expense types and descriptions. Monthly pretax deduction limits are also below:
Commuter Benefits Chart
|Transit Pass||Any pass, token, fare card, voucher, or similar item for mass transit (bus, subway, train, ferry) OR a vehicle (operated by a third party) that sits at least 6 people, not including the driver|
|Parking||Parking lot fees for a lot that is located near the business premises|
|Commuter highway vehicle||Any highway vehicle that seats at least 6 adults, not including the driver|
Monthly Pretax Deduction Limits
|Commuter highway vehicle||$280|
Perks of Commuter Benefits Plans
With commuter benefits plans, also referred to as Transit accounts, both employers and employees enjoy some tax savings. If the plan is offered as a pre-tax contribution, the employer saves money on payroll taxes since the pre-tax exclusion doesn’t count towards an employee’s official compensation. Employees save on pre-tax contributions to their commuter plan because it reduces their total taxable income.
An additional perk for those with a commuter benefit plan is an account-linked debit card. The card connects directly to a specific account funded by employee contributions and deducts the money whenever a purchase is made for commuter expenses. This can help account holders keep better track of their transit purchases, and they don’t have to worry about filing claims for reimbursement. Some debit cards feature transit restrictions which allow the card to only be used where transit fare is sold, which provides enhanced security and reduces fraud.
Talk to your company or benefits administrator about commuter benefits, to see if you can save on those travel-related costs.
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