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 2025 are $325 per month for qualified transportation expenses reimbursement and $325 per month for qualified parking, (increased from $315 in 2024).

In addition to the above, Internal Revenue Code Section 132 also previously allowed for “qualified bicycle commuting reimbursements”³ to be provided on a non-taxable basis.⁴  These reimbursements must be funded by the employer – Section 132 does not authorize employee pre tax salary reduction contributions as a method for funding this particular benefit. The Tax Cuts and Jobs Act, passed in 2017, suspended the ability for employers to provide bicycle commuting reimbursements on a non-taxable basis for the period of January 1, 2018 through December 31, 2025. Accordingly, bicycle commuting reimbursements that would otherwise be considered a qualified transportation reimbursement expense are taxable for this eight-year suspension period.

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.⁵

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 the laws, and where available, a link to the official website regarding the mandated state/regional/local commuter benefit program.

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]” 2022 Publication 15-B, page 4
³ Qualified bicycle commuting reimbursements include “any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.”
⁴ These reimbursements must be funded by the employer – Section 132 does not authorize employee pre-tax salary reduction contributions as a method for funding this particular benefit.
⁵ See Revenue Ruling 2014-32 for additional information.

Regulatory and Legislative Strategy Group