Commuter Choice = Tax Free

The Commuter Choice Benefit

It's called Commuter Choice because it gives employees an attractive alternative to driving to work alone- a real choice. Presently, an employer may give up to $115 a month or up to $1,380 a year, in actual eligible transportation costs tax-free to an employee. Participating employers lower their FICA and Federal income tax costs. In many areas, state and city income taxes are reduced as well. The maximum tax-free benefit may increase each year based on increases in the cost of living. Commuter Choice may be used on public transit buses, trains, ferries and vanpools.

Not every employer can afford to pay for the full transportation benefit so the Commuter Choice has built-in flexibility. Take a look at the options.

A Program for Every Budget

Employer-Paid Benefit Option

Increasingly, employers, as a matter of company policy, are offering the full transit benefit to employees. Some employers do so to reward workers for their contributions and accomplishments. Others see it as an investment. When employers offer the benefit, it boosts employee morale and that can translate into more satisfied customers. When employers pick up the tab for their employees, the Commuter Choice transit benefit is equivalent to a low cost salary or wage enhancement. If the same amount were to be given as a pay increase, it would cost your organization more in FICA. That's not all. Your employees would pay more in income taxes.

You do the math. If your employees were to receive an equivalent cash salary raise of $1,380 per year instead of the tax-free benefit, they would actually end up paying for it, reducing the value of the benefit by more than 50%. It would take almost $2,200 in taxable salary to yield $1,380 after taxes. As an employer, you would avoid the costs of the matching FICA. If you are a not-for-profit organization, you may not realize any tax savings, but you gain the upper hand attracting and retaining employees in a competitive labor market. When you consider the overall value to your employees, it may cost you more not to provide Commuter Choice.

Employee-Paid Pre-tax Benefit Option

Okay. You are just learning about Commuter Choice and your budget is already set for the year. You cannot cover the cost of the benefit this year. You may be asking yourself if there is a way to broker this opportunity for your employees. You bet there is! Consider the Employee-Paid Pre-tax Benefit program. Many smaller companies choose this option.

By establishing a pre-tax deduction program, you permit your employees to exchange part of their gross income for employer-provided transit or vanpool costs. Since your employees fund the benefit, they save Federal payroll and income taxes. The amount of the pre-tax deduction is no longer treated or reported as taxable salary. In many areas, this deduction may also be free of state or city income tax.

This special transportation pre-tax benefit program is exempt from complex use restrictions common to cafeteria plans and flexible spending accounts (FSA). These "qualified transportation fringe benefits" are excluded from cafeteria plans under Section 125 of the Internal Revenue Code (Title 26). The company will not have to write a plan document or obtain IRS approval, so there is less paperwork. There are no irrevocable elections or forms. A pre-tax program can be started any time of the year, or enrollment can be limited to certain times of the year.

While there is a great deal of flexibility in creating a pre-tax transit benefit program, it is advisable to consult with tax counsel to determine how your program may affect ceiling or cap limitations on employee-directed tax deferred retirement accounts, such as 401(k) plans.

Fare Share Benefit Option

The third option is for the employer and employee to share the costs. That's why this approach is called the Fare Share Commuter Choice Benefit. The employer could subsidize part of the $115 benefit and allow your employees the option to fund the balance from pre-tax income. The employer's contribution will be in addition to salary or wages. Employers purchase the passes and vouchers, using the contributions from employer funds and employees salaries, and then distribute them to the employees.

The best way for your employees to stretch the value of the amount they are paying is to arrange for the funds to be taken out of their paychecks before taxes are applied, as a pre-tax benefit. For example, an employer could provide any member who elects to participate in the program a transit pass worth $65 in addition to his/her regular salary. The employees could use pre-tax income that is exchanged for a pass for $65, for a total monthly benefit of $115. The company receives an equivalent deduction from business income taxes for the $65 expense, while employees save on Federal payroll and income taxes on the $65. The company would also save on payroll taxes for the $65.

Cash Reimbursement Restrictions

Cash Reimbursement for transit expenses is permitted in very limited circumstances. These tax incentives are intended to boost transit ridership, so cash reimbursement for commuting expense is discouraged. In fact, the only time an employer can reimburse employees for cash outlay for transit is in areas where vouchers or bus/rail passes, tokens, farecards, tickets, etc. are not "readily available" to be exchanged for transit or vanpool services. See IRS rules governing section 132(f) benefits for a definition of "readily available." In most cases, the employer must provide vouchers or bus/rail passes, tokens, farecards, tickets, etc. instead of cash reimbursement.

For purposes of illustration, if the employee commutes on Transit Agency A and the agency only accepts cash payments, cash reimbursement up to $115 limit would be permitted. The reimbursement may be made from corporate funds or pre-tax employee salaries, or a combination of both.

What's Covered?

Buses, Trains, Ferries and …

Vanpools. Also referred to as "Commuter Highway Vehicles" under IRS rules, vanpools are defined as any highway vehicle that has seating capacity of at least six adults excluding the driver and meets two requirements for mileage use. At least 80 percent of the mileage use must be reasonably expected to be (1) for transporting employees in connection with travel between their residences and their place of employment, and (2) on trips during which the number of employees transported for commuting is, on average, at least one-half of the adult seating capacity excluding the driver.

2+2 = More

The Bottom Line

Commuter Choice makes sense. It is a great way to provide employees with a cost -effective, value-added benefit. The changes in the Internal Revenue Code allow your company the greatest flexibility to create a program that works for you and your employees. Remember, satisfied employees means satisfied customers.

Commuter Choice… It works for business. It works for the economy. It works for the environment. It works for the country.

So what are you waiting for? Contact UTA Rideshare today to find out how you can take full advantage of the tax-free Commuter Choice transportation benefit. These options can provide real savings to your company and your employees.