The Status of Qualified Transportation Fringe Benefits

May 23, 2019

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.

Berkeley Municipal Code 9.88

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.

Rule 2202

 

South Coast Air Quality Management District

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’s Commuter Benefits Ordinance

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.

San Francisco Bay Area Commuter Benefits Program

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 York City Commuter Benefits Law

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.

SB 1567

N.J. Press Release

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.

Commuter Benefits Ordinance

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.

D.C. Commuter Benefits Law

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[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.

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