Tax Benefit Implementation
A Win-Win situation is the goal of everyone doing business.
Commuter Choice Tax Benefits are a Win-Win-Win for
employers, employees and the environment.
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he Commuter Choice Tax Benefits program is a valuable addition to any benefits package. Unlike health care or vacation plans, employees can use the Commuter Choice Tax Benefit every day they commute to work.
The program, based on Section 132(f) of the federal tax code, allows employers to offer employees a variety of financial incentives for using alternative commute modes. Section 132(f) covers transit, vanpool and bicycle benefits as well as qualified parking. Employers and employees save money, employees save time, the employer is viewed as a good corporate citizen and the environment benefits from reduced traffic congestion. With vehicle exhaust as the number one source of air pollution in the Bay Area, Commuter Choice Tax Benefits can lead to cleaner air.
Employers offering a Commuter Choice Tax Benefits program, have the ability to offer the benefit in one of three ways:
1) In addition to compensation (offer a subsidy)
2) In lieu of compensation (allow employees to set aside pre-tax dollars), or
3) As a combination of these two methods (subsidize part of the commuting cost and allow employees to pay for the remainder of the cost, up to the monthly limit, with pre-tax dollars).
For taxable years beginning in January 1, 2010, the federal limitation for the transit, vanpool, and parking benefit is $230 a month per employee ($2,760 a year). Beginning the same date the federal limitation for the bicycling benefit is $20 per qualified bicycle commuting month.
A qualified bicycle commuting month is any month in which the employee:
1) Regularly uses a bicycle for a substantial portion of the travel between the employee’s residence and place of employment and
2) Does not receive:
- Transportation in a commuter highway vehicle
- Any transit pass, or
- Qualified parking benefits
The Commuter Choice Tax Benefits program is exempt from the usual restrictions and reporting requirements that accompany other pre-tax programs allowed by the IRS. There are no plan filings or forms for the employer to fill out, no irrevocable elections and no mandatory enrollment dates. It is not subject to the regulations governing cafeteria plans – and cannot be offered as part of a cafeteria plan.
Employers offering Commuter Choice Tax Benefits will enjoy increased tax savings, improved employee recruitment and retention, improved employee morale, and a reduction in operating costs for parking, among other benefits. Employees will enjoy reduced commuting costs, reduced vehicle ownership costs and more time saved by commuting by transit or vanpool. Employees using alternate forms of commuting frequently have less stress and demonstrate greater productivity.
A Program for Every Budget
More often, employers are offering full transit benefits to employees. When employers contribute to employee commuting costs, it is the equivalent of offering a low-cost wage enhancement.
For example: if a $230 transit benefit were given as a pay increase instead of a commuter benefit, the employer would have to pay payroll taxes on the amount given and employees would pay more in income taxes. When you consider the overall value of offering Commuter Choice Tax Benefits to employees, it may cost the employer more not to provide these benefits.
In 2001, the IRS established Section 132(f), Qualified Transportation Fringe, which now enables commuters to pay for transit, vanpools, bicycling and/or parking costs pre-tax. Depending on the individual’s income tax bracket, the savings can add up to hundreds of dollars annually for employees.
An employee can use the pre-tax benefit for “qualifying transportation expenses.” Qualifying expenses include items such as transit passes, vanpool subscriptions, and parking fees. Qualifying bicycle commuting expenses include the purchase of a bicycle and bicycle improvements, repair and storage.
Implementing a Tax Benefits Program
- Contact representatives from top management, human resources, payroll, and the accounting/finance departments to coordinate efforts and to ensure buy-in.
- Check with the company tax specialist on how to establish and manage the program.
- Survey employees to learn about their commuting habits to determine which benefits to offer.
- Determine which employees will receive benefits. These benefits do not have non-discrimination requirements. For example, you can offer the benefit to employees who work in one location versus another.
- Based upon budget, determine the delivery of benefit - a subsidy, pretax deduction, or a combination of both.
- If offering a subsidy, determine the level and limitations.
- Decide to administer the program internally or via outsourcing. There are advantages to both. Typically, smaller companies will manage their own programs.
- Decide how to distribute benefit(s) to employees.
- Update the personnel manual to include the benefit and qualifications for receiving the benefit.
- Announce market and educate the program to employees. In documentation, list all the rules, deadlines and limitations. Provide a convenient sign-up sheet, especially if allowing employees to set aside pre-tax wages for the benefit. Employees will need to authorize any salary deductions.
- Make changes as necessary to W-2 forms/information. If offering the benefit as a subsidy, there will be no changes in the W-2 form. If offering it as a pre-tax benefit, it will be noted in the appropriate box on the W-2.
- Purchase / distribute the benefit - monitor the program - analyze the savings.
Calculating the Benefit: How much could it save your employee?
Step One:
Determining how much an individual pays in taxes.
Example: for an individual in the 25% tax bracket[1]:
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Tax |
Tax Percentage |
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Federal Income Tax |
25% |
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FICA |
Social Security |
6.2% |
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Medicare |
1.45% |
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9% |
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Total Tax |
41.65% |
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Step 2:
Using the Total Tax percentage from the table above (in this sample, 41.65%) to calculate that individual’s annual tax savings.
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Annual Expenditures: |
Transit or Vanpool |
Parking |
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Travel Expenses (buying transit passes, etc) |
$2,760 |
$2,760 |
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Tax Savings (applying 41.65% to each expense) |
$1,150 |
$1,150 |
What this shows is that an employee in the 25% tax bracket could save up to $1,150 per year on transit, vanpool or parking costs.
In summary, for an employee who makes $34,000 per year and takes transit, these pre-tax savings are the equivalent of a $1,150 raise at not cost to the employer.
With qualified transportation fringe benefits (Section 132(f) of the Internal Revenue Code) or "Commuter Tax Benefits," employers save on payroll related taxes and employees save on federal income taxes.
Commuters can receive both the transit and parking benefits (i.e., up to $460 per month). Employers can allow employees to use pretax dollars to pay for transit passes, vanpool fares and parking.
[1] For 2008, the 25% federal income tax bracket applied to single individuals earning between $32,551 – $78,850 and married couples earning between $65,101 - $131,450.
[2] Assumed 9% combined state and local tax.
