General Rules Surrounding Commuter Benefits

IRS Rules Surrounding Commuter Benefits

Under the Federal Internal Revenue Code¹, employers may provide qualified transportation/commuter benefit programs to their employees on a pre-tax basis, subject to certain IRS limits. These programs may include qualified parking, transit passes, commuter expense reimbursement programs and transportation to and from work in a commuter highway vehicle² (“vanpooling”). The IRS limits for calendar year 2024 are $315 per month for qualified transit expense reimbursement and vanpooling and $315 per month for qualified parking, a 5% increase over the 2023 limits ($300 per month).

Previously, employees could receive “qualified bicycle commuting reimbursements” on a non-taxable basis if they were funded by an employer. However, due to the Tax Cuts and Jobs Act (passed in 2017), employees can no longer receive these reimbursements on a non-taxable basis until at least January 1, 2026. Accordingly, bicycle commuting reimbursements that would have been considered a qualified transportation reimbursement expense are considered taxable income to the employee for the foreseeable, albeit limited, future.

Employees that elect to enroll in a commuter benefit program can save FICA, federal income taxes, and, in some places, state income taxes on qualified expenses. Employers could also save on payroll taxes (FICA and FUTA) on amounts employees set aside in the program, which generally offset any administrative costs of the program. Although an employer may reimburse employees for their commuter expenses, the IRS expressly prohibits employers from directly reimbursing the cost of an employee’s transit pass if transit passes (including certain debit and smart cards) are readily available for distribution to employees.

State and Local Commuter Benefits Legislation

A growing number of cities and regional areas (including the state of New Jersey) have passed laws or ordinances requiring certain employers to provide an avenue for employees to receive pre-tax commuter benefits. Many of these laws allow employers to provide this benefit in the following ways:

1. Establish a Pre-Tax Qualified Transportation Assistance Program – Under this category, employees contribute pre-tax dollars to a commuter flexible spending account (FSA) and receive direct reimbursement of their commuter expenses without taxation, subject to Federal IRS maximum monthly limits. The Federal IRS maximum monthly limit adjusts most years pursuant to inflation. Employers may also subsidize some of the expense towards employees’ qualified transportation expenses but are not required to do so. An employer may provide funding for employees’ transit expenses up to the monthly inflationary amount set by the IRS, less any pre-tax transit expense reimbursements the employee receives from other sources (e.g., employee pre-tax contributions to a commuter FSA) that month.
2. Employer Purchased Transportation Vouchers – An employer may purchase transportation vouchers and directly provide those transportation vouchers to employees.
3. Employer Provided Commuter Highway Vehicle – Employers may provide a commuter vehicle that transports employees to and from employees’ respective neighborhoods and an employer’s worksite location.

Many of the ordinances and laws specifically mention the requirement or option to offer a qualified bicycle commuting expense reimbursement program. However, as mentioned above, qualified bicycle commuting expense reimbursements will be considered taxable under the federal tax code for the eight year period of 2018 through 2025.

The resource below provides a link to certain laws, and where available, a link to the official website regarding the mandated state/regional/local commuter benefit program. The information provided may not reflect each and every applicable law in every state and/or locality.

¹ 26 U.S. Code Section 132 – Certain Fringe Benefits
² To qualify, the commuter highway vehicle must “…seat at least 6 adults [excluding the driver], and the employer must reasonably expect that at least 80% of the vehicle mileage will be for transporting employees between their homes and work-place with employees occupying at least one-half the vehicle’s seats [excluding the driver]” 2023 Publication 15-B, page 21

Regulatory and Legislative Strategy Group