Author: Allie Waits | Compliance Consultant for Marsh & McLennan Agency's Upper Midwest Region
The Employer’s Road Map
Since 1985, the IRS has allowed employers to provide tax-free qualified transportation benefits to their employees. These benefits include parking, vanpooling, transit passes, and bicycle commuting expense reimbursement. Historically, employees were able to pay for these benefits using pre-tax dollars up to an annual maximum, and employers were able to take a tax deduction for their own contributions. The 2019 maximum contribution limit for qualified parking benefits is up to $265/month, and the combined limit for both transit passes and vanpooling expenses is also $265/month.
Congress Puts Up a Roadblock
When the Tax Cuts and Jobs Act (TCJA) passed in 2017, it generally left the pre-tax status of transportation fringe benefits for employees alone, but employers lost the ability to take tax deductions for employer-provided commuter or parking benefits.[1] The TCJA also affected nonprofit companies, as it requires they include the cost of qualified transportation benefits in their unrelated business income (UBTI). UBTI is a tax-exempt organization’s gross income that it earned from any unrelated trade or business that the organization regularly carries out, minus any allowable deductions.
Employers Try a Round-a-Bout
A number of practitioners suggested employers could work around the loss of the tax deduction by providing additional taxable compensation to employees contingent on the employees using it to elect transportation fringe benefits through a salary reduction arrangement (SRA). Under this theory, the additional compensation remains deductible to the employer as wages and employees could exclude the additional compensation from taxable income by electing the benefit through the SRA instead of accepting the additional cash compensation.
And Partially Succeed
On its face, the Internal Revenue Code (IRC) doesn’t appear to support an employer deduction under the proposed workaround[2] and language found in IRS Publication 15-B also seems to reject it.[3]
The IRS resolved this in IRS Notice 2018-99 and will permit an employer to take a tax deduction for the value of transportation fringe benefits provided in excess of the exclusion limit ($265/month for 2019).[4]This excess is also taxable income to the employee, meaning the employee cannot exclude it by deferral through an SRA.
Example 1
An employer provides $150/month in additional compensation to be used toward parking expenses in a parking garage adjacent to the employer’s office. The amount provided does not exceed the monthly exclusion amount for 2019 ($265/month), so no portion of the $150/month may be deducted by the employer. The amount provided is not taxable income to the employee.
Example 2
An employer provides $500/month in additional compensation to be used toward parking expenses in a parking garage adjacent to the employer’s office. In 2019, the employer can deduct $235/month ($500 - $265) as additional paid wages. This $235/month is also taxable income to employee(s). It does not matter if the employee contributes through an SRA.
Note: 2019 IRS Publication 15-B still includes the seemingly contradictory language, but we believe the guidance in IRS Notice 2018-99 controls.
Which Road to Take?
Several states and localities require employers to provide transportation benefits to their employees. When stakeholders raised concerns with the IRS over the TCJA’s effect on employers in these locations, the IRS responded that the TCJA’s reduction of the corporate tax rate beginning in 2018 should off-set losing the deduction. Employers considering eliminating the benefit should review state and local laws (see State and Local Requirements below), as well as check the tax implications and weigh them against these benefits’ ability to attract and retain new employees.
State and Local Requirements
Despite the TCJA’s tax deduction limitations, certain states and cities require employers to provide these benefits. Employers operating in the following cities, counties, and/or states should be aware of their local transportation requirements.
Jurisdiction |
Covered Employers |
Transportation Requirements |
More Information |
Berkeley, CA |
Berkeley employers with at least 10 employees working an average of 10 hours per week |
Employers must offer one or more of these options: · Pretax plan allowing employees to exclude transit, vanpool, or bicycle commuting expenses from taxable wages (bike expenses subject to TCJA limits); · A transit subsidy equal to the value of a local monthly AC transit pass; or · An employer-provided shuttle service. |
|
Los Angeles, CA Including Orange County and portions of San Bernardino & Riverside Counties |
Employers with 250 or more employees |
Employers must register with the South Coast Air Quality Management District and choose one of the options to reduce emissions. |
|
Richmond, CA
|
Richmond employers with at least 10 employees working an average of 10 hours per week |
Employers must offer one of the following options: · Pretax plan allowing employees to exclude transit, vanpool, or bicycle commuting expenses from taxable wages (bike expenses subject to TCJA limits); · Employer purchased transit pass or reimbursement for vanpool charges equal to the cost of an adult monthly transit pass; · Employer provided vanpool or bus; or, · Other benefit preapproved by city. |
Commuter Benefits Ordinance 22-09
|
San Francisco, CA |
Employers with a location in San Francisco that have 20 or more employees nationwide |
Employers must offer one of the following options: · Pretax plan allowing employees to exclude transit, vanpool from taxable wages; · Employer paid monthly benefit equal to the cost of the San Francisco Muni “A” Pass (including BART); · Employer provided company funded bus or van service transporting employees to and from the workplace; or, · Any combination of the above options. |
|
San Francisco Bay Area, CA |
Employers with at least 50 employees within the Bay Area Air Quality Management District |
Employers must register with the Bay Area Commuter Benefits Program and offer one of the following options: · Pretax plan allowing employees to exclude transit, vanpool from taxable wages; · Subsidy to reduce monthly transit or vanpool expenses; · Employer provided transit service; or, · Another commuter benefit that is as effective as one of the above options. |
|
New York City, NY |
Non-governmental New York City employers with at least 20 full-time, non-union employees |
Covered employers must offer commuter benefits to eligible employee (meaning employees can use pre-tax dollars to purchase transportation benefits). Transit that is covered includes: · NYC regional mass transit services, including Metropolitan Transportation Authority subway and bus; Long Island Rail Road; Amtrak; New Jersey Transit; and Metro-North; · Eligible ferry and water taxi services; · Eligible vanpool services; · Eligible commuter bus services; and · Access-A-Ride and other area paratransit providers. Employers can also purchase a transit pass or pay for other transportation on public or privately owned mass transit or commuter highway vehicle. |
|
New Jersey |
Employers with 20 or more employees |
Employers must offer a pre-tax transportation benefit allowing employees to exclude funds used to pay for commuter highway vehicle and transit benefits from their gross income. |
|
Seattle, WA |
Employers with 20 or more employees
Effective January 1, 2020; enforcement begins January 1, 2021 |
Employers must offer pre-tax transportation benefit for transit or vanpool reduction, or subsidize purchase price of transit pass. |
|
Washington, D.C. |
Employers with at least 20 employees |
Employers must offer one of the following options: · Pretax plan allowing employees to exclude mass transit or vanpool from taxable wages; · Employer paid tax-free subsidy of a transit pass for public transit system, or reimbursement of vanpool costs of an equivalent amount to a trip on public transit; or, · Employer provided bus or vanpool service for employees. |
|
[1] In a somewhat bizarre twist, the employer tax deduction for bicycle benefits remains (up to $20/month), but employees must include it in taxable income. Employees also cannot pay for this benefit on a pre-tax basis through payroll deductions.
[2] Specifically, the language of IRC Section 274(e)(2) doesn’t seem to support excluding the “earmarked’ transportation benefits as additional compensation because it doesn’t reference transportation expenses.
[3] Page 21 of IRS Publication 15-B states, “Section 13304 of P.L. 115-97 provides that no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after 2017.”
[4] Tax-exempt entities also appear to be able to exclude this amount when calculating UBTI.
Related Offerings
Compliance Support & OversightYou May Also Be Interested In
- Event
01.27.2021
Webinar | The New Norm: Maintaining Productivity While Working From Home
- Event
02.04.2021
Webcast | Continued Road to the Vaccine: Clinical and Compliance Considerations for Employers
- Event
02.18.2021
Webcast | HIPAA Privacy and Security Training
- Event
03.16.2021
Webinar | Pay Equity Disputes and Risks
- Event
03.18.2021
Webcast | How to Survive a U.S. Department of Labor Audit
- Event
04.15.2021
Webcast | Qualifying Life Events and Permitted Election Changes
- Event
05.20.2021
Webcast | Wellness Programs
- Event
06.17.2021
Webcast | Mid-Year Compliance Review
- Event
07.15.2021
Webcast | FMLA and Employee Benefits
- Event
08.19.2021
Webcast | Medical Expense Spending Accounts (Health FSA, HRA, HSA)
- Event
09.16.2021
Webcast | COBRA
- Event
10.21.2021
Webcast | Domestic Partner and Non-Tax Dependent Coverage
- Event
11.18.2021
Webcast | ACA Reporting Requirements
- Event
12.16.2021
Webcast | Year-End Compliance Review and Forecast
- Blog
01.25.2021
Summary of Benefits Provisions in the 2021 Consolidated Appropriations Act – Part 2
- Blog
01.22.2021
Annual CMS Medicare Part D Disclosure Due for Calendar-Year Plans
- Event
01.21.2021
Webcast | State Individual Mandate Reporting Requirements
- Blog
01.21.2021
A Bitter Pill to Swallow
- Event
01.20.2021
Webinar | New Developments in the Classification of Workers
- Event
01.13.2021
Webinar | Leave of Absence and Return to Work Issues in the Era of COVID-19
- Blog
12.29.2020
A Coronavirus Update for Employers
- Blog
12.29.2020
A Summary of Benefits Provisions in the 2021 Consolidated Appropriations Act
- Event
12.17.2020
Webinar | Year End Checklist 2020 and Future Forecast 2021
- Blog
12.04.2020
Additional Health Reimbursement Arrangements Allowed Under Final Rules
- Blog
11.20.2020
Federal Agencies Issue Final Rules Addressing Transparency in Coverage
- Event
11.19.2020
Webinar | ACA Reporting Requirements 2020
- Event
11.12.2020
Webcast | 2020 Election Results: The Impact to Benefit Plans
- Blog
10.30.2020
A Summary of 2021 Health and Welfare Plan Limits and Other Annual Adjustments
- Blog
10.22.2020
Final 2020 IRS Forms 1094/1095 Published
- Event
10.15.2020
Webinar | Health Savings Accounts 2020
- Blog
10.14.2020
INSIGHTS Newsletter
- Blog
10.09.2020
Affordable Care Act Reporting Relief Extended for 2020
- Blog
10.09.2020
Michigan Revises No-Fault Auto Insurance
- Event
10.08.2020
Webcast | A Tale of Two Breaches
- Blog
09.24.2020
DOL Issues New FFCRA Leave Guidance
- Event
09.17.2020
Webinar | FMLA and Employee Benefits 2020
- Blog
09.14.2020
Transportation Fringe Benefits Update
- Blog
08.31.2020
Massachusetts Family Medical Leave Update: Renewal of Fully Insured and Self-Funded Private Plan Exemptions, Upcoming Dates, Plan Options and Benefit Coordination
- Blog
08.26.2020
The Empire State Strikes Back
- Event
08.20.2020
Webinar | Compliance Considerations When Self-Insuring 2020
- Blog
07.29.2020
2021 Employer Affordability Safe Harbor
- Event
07.22.2020
WEBINAR | Next Chapter: Massachusetts Family Leave Act 2021
- Blog
07.22.2020
Massachusetts Paid Family Medical Leave Update (July 2020)
- Blog
07.22.2020
Massachusetts Creditable Coverage – Employer Update (2020)
- Blog
07.22.2020
The Rise of State Individual Mandates - July 2020
- Event
07.16.2020
Webinar | Annual Required Notices 2020
- Blog
07.01.2020
IRS Addresses Direct Primary Care and Health Care Sharing Ministries
- Blog
06.30.2020
Proposed ESG Regulation
- Event
06.18.2020
Webinar | Mid-Year Compliance Review 2020
- Blog
06.16.2020
COVID-19 Plan Administration Relief: The Good, the Bad, and the Ugly
- Blog
06.16.2020
What’s Old is New Again – Annual PCORI Fee is Due July 31st
- Event
05.28.2020
Webcast | COVID-19 Update: Navigating the Coronavirus, Vaccines, Testing and Wellbeing
- Blog
05.28.2020
DOL Finalizes Rule Expanding Use of Electronic Delivery for Plan Documents
- Blog
05.27.2020
2021 Plan Limits and Final Coupon Guidance Released
- Blog
05.27.2020
A Tale of Two IRS Notices
- Event
05.21.2020
Webinar | COBRA 2020
- Event
05.19.2020
Webinar | Legal and Compliance Return to the Workplace: Considerations for Employers
- Blog
05.11.2020
IRS and DOL Extend Filing Deadlines Due to COVID-19
- Blog
04.20.2020
IRS Extends Deadlines Due to COVID-19
- Event
04.16.2020
Webcast | COVID-19: Managing the Impact- Weekly Update 4.16.20
- Event
04.16.2020
Webinar | ERISA Basics 2020
- Blog
04.10.2020
CARES Act Signed Into Law
- Event
04.09.2020
Webcast | COVID-19: Managing the Impact- Weekly Update 4.9.20
- Event
04.02.2020
Webcast | Update on COVID-19: Navigating the Coronavirus and Managing the Impact
- Blog
03.30.2020
CARES Act Provisions Expand Retirement Plan Access for Individuals Impacted by COVID-19
- Blog
03.27.2020
FFCRA Employee Rights Poster Notification Poster Available
- Blog
03.26.2020
DOL Issues New Guidance on FFCRA and Required FFCRA Posters
- Event
03.24.2020
Webinar | Navigating the Coronavirus and Managing the Impact
- Blog
03.23.2020
The Rise of State Individual Mandates - March 2020
- Event
03.19.2020
Webinar | HIPAA Privacy and Security Training 2020
- Blog
03.10.2020
Federal Agencies Issue Proposed Rules Addressing Transparency in Coverage
- Event
02.20.2020
Webinar | Qualifying Life Events & Permitted Election Changes 2020
- Blog
02.13.2020
The Rise of State Individual Mandates
- Blog
02.10.2020
Annual CMS Medicare Part D Disclosure Due for Calendar-Year Plans
- Event
01.23.2020
Seminar | Employment Law Landscape 2020
- Blog
01.22.2020
The Affordable Care Act’s Employer Mandate: Part 4
- Event
01.16.2020
Webinar | Wellness Programs 2020
- Blog
12.26.2019
Repeal, Repeat, Remand – Ho Ho Hum?
- Event
12.19.2019
Webinar | Year End Checklist and Future Forecast
- Blog
12.09.2019
Employer HIRD Form Due on December 15, 2019
- Blog
12.04.2019
Affordable Care Act Reporting Relief Extended for 2019
- Event
11.21.2019
Webinar | ACA Reporting Requirements
- Blog
11.20.2019
IRS Releases Draft 2019 Instructions for Forms 1094/1095
- Blog
11.08.2019
IRS Releases 2020 Limits for FSAs and Other Benefits
- Blog
10.28.2019
California Mandates a Notice Requirement for Flexible Spending Accounts
- Blog
10.28.2019
All That Glitters is not Gold
- Blog
10.28.2019
Medical Loss Ratio Rebates
- Blog
10.28.2019
The Affordable Care Act’s Employer Mandate: Part 3
- Event
10.17.2019
Webinar | Health Savings Accounts
- Blog
10.09.2019
2019 Massachusetts HIRD Form Filing Deadline Approaches
- Blog
10.04.2019
Insurance Carriers Approved for Mass Paid Family Medical Leave Act
- Blog
09.30.2019
New Health Reimbursement Arrangements Allowed Under Final Rules
- Event
09.19.2019
Webinar | New HRA Options
- Blog
09.19.2019
2020 Employer Affordability Safe Harbor
- Blog
09.18.2019
The Affordable Care Act’s Employer Mandate: Part 2
- Blog
09.17.2019
Medicare Part D Notice Reminder
- Event
08.15.2019
Webinar | Association Health Plans
- Blog
08.12.2019
And in this Corner…the Fight to Expand Association Health Plans Continues
- Blog
07.31.2019
New Guidance on Mass FMLA Payroll Contributions and Wage Withholdings
- Blog
07.22.2019
IRS Expands Definition of Preventive Care for Qualified High Deductible Health Plans
- Event
07.18.2019
Webinar | Annual Required Notices 2019
- Blog
07.10.2019
Tax Consequences of Gym Membership Reimbursement
- Blog
07.09.2019
Agencies Release 2020 Adjusted Limits
- Blog
07.08.2019
The Affordable Care Act’s Employer Mandate: Part 1
- Blog
07.01.2019
President Signs Executive Order to Improve Healthcare Price and Quality Transparency
- Event
06.20.2019
Webinar | Mid-Year Compliance Review
- Blog
06.18.2019
Mass Paid Family Medical Leave Update
- Blog
05.28.2019
Potential FMLA Violations
- Blog
05.24.2019
Annual PCORI Fee is due
- Event
05.16.2019
Webinar | Wellness Programs
- Blog
05.03.2019
Massachusetts Online Exemption Application Now Available for Employers Seeking a Private Plan Option to State Paid Family Medical Leave Program.
- Blog
04.30.2019
Massachusetts Employer Alert
- Blog
04.26.2019
Massachusetts Releases New Guidance and Employee Notice Template For Massachusetts Paid Family and Medical Leave (PFML)
- Event
04.18.2019
Webinar | HIPAA Privacy & Security Training
- Blog
04.11.2019
Leave Laws Continue to Multiply
- Blog
04.10.2019
Massachusetts Creditable Coverage
- Blog
04.02.2019
Association Health Plans (AHPs) – Update
- Blog
03.25.2019
U.S. Department of Labor Releases Proposed Overtime Rule
- Event
03.21.2019
Webinar | Federal Continuation Coverage
- Blog
03.19.2019
Deadline Approaching: Paid Family and Medical Leave Act
- Blog
03.06.2019
Reminder: Annual CMS Medicare Part D Disclosure
- Blog
03.05.2019
Mistaken HSA Contributions
- Blog
03.04.2019
Frequently Misunderstood Health Savings Account Issues
- Event
02.21.2019
Webinar | FMLA & Employee Benefits
- Event
02.13.2019
Seminar | How to Survive a DOL Audit
- Blog
02.05.2019
Government Considering Modifications to HIPAA Privacy and Security Rules
- Blog
02.04.2019
Automatic Enrollment Given a Boost
- Event
01.29.2019
Employment Law Landscape 2019
- Event
01.17.2019
Webinar: ACA Reporting Requirements
- Blog
12.31.2018
Slowly Filling in the Blanks
- Blog
12.27.2018
Women’s Contraceptive Coverage under the Affordable Care Act (ACA) – Update
- Blog
12.20.2018
Making a List and Checking It Twice
- Blog
12.18.2018
Texas Federal Court Rules ACA Unconstitutional
- Event
12.14.2018
Webinar | Q4 2018 Health Care Reform Update
- Blog
12.03.2018
An End to Pharmacy Gag Clauses
- Blog
12.03.2018
Employment Law Update: Minimum Wage Keeps Climbing
- Blog
11.29.2018
2018 Form 1094/1095 Reporting
- Blog
11.21.2018
Do the HIPAA Privacy and Security Rules Apply to My Organization? Part Two
- Event
11.20.2018
Webinar | Back to Basics: Consumer-Based Plans 101
- Blog
11.16.2018
Better Late Than Never
- Blog
11.02.2018
Compliance Update: HRAs Poised For a Facelift
- Blog
10.22.2018
FMLA Update - Organ Donation
- Blog
10.18.2018
Do the HIPAA Privacy and Security Rules Apply to My Organization?
- Blog
09.14.2018
Navigating the Wellness Program Rules for 2019
- Event
01.23.2018
Employment Law Landscape 2018
- Blog
10.06.2017
Interim Rules on Contraceptive Exemptions