Federal tax code allows employers to offer up to $110 per month ($1,320 per year) in transit and vanpool benefits tax free. According to the IRS Code Sec. 132(f), qualified transportation fringe benefits are excludable from income for purposes of taxation. These benefits include transit passes, vanpool expenses and qualified parking (Parking will be discussed more fully in the next section). An employer is not limited to providing a transit or vanpool of $110 per month, however, any excess value must be included in the employee’s gross income for income and employment tax purposes.

The scope of the tax-free Commuter Benefits was expanded greatly in 1998 with the passage of the Transportation Equity Act for the 21st Century. This act amended Section 132(f) of the Internal Revenue Code as it relates to employer provided commute options. Qualified transportation fringe benefits may be offered by employers in any of three ways:

1. Employer-Paid Program. In this set up, the employees receive transit or vanpool benefits completely free of all U.S. payroll and federal income taxes up to $110 per month. The employer pays the full cost of the benefit and gets a deduction from its federal business income taxes for the value of the benefit.This option is one of the most appealing to employees and has the potential to decrease single-occupant vehicle driving. Therefore, it has the most impact on alleviating congestion and improving air quality and is a primary option in the Best Workplaces for Commuters(SM) program. To qualify transit/vanpool programs as a primary benefit, the employer must offer at least $30 in direct benefits.

2. Pre-Tax Benefit. Under this program, employees may have up to $110 taken out of their current monthly pay before taxes are applied in order to pay for the cost of commuting by transit or vanpools. Employees would not pay federal income taxes or payroll taxes on the amount they set aside. Employers also would not pay U.S. payroll taxes or related payroll costs on the amount. This program costs the employer practically nothing except the costs associated with the administration of the benefit and saves them tax dollars. It also saves the employee tax dollars.

3. Cost-Sharing.  Under this option, employers may share the cost of commuting to and from work with employees, combining the two methods above. For example, the employer may offer $30 per month in benefits and allow the employee to set aside the other $80 as a pre-tax benefit (for a total of $110).

Employer-Paid Programs. If the employer chooses to pay for the benefit, then the value of the benefit can be deducted from their corporate income taxes and is free of employer payroll taxes.  As a result, the money spent on the benefit is greatly reduced by the tax savings.

Commute programs create big wins for a company from a morale and productivity point of view. Employees view these programs favorably, which in turn increases appreciation for the employer and increases commitment and productivity. From a recruitment and retention standpoint, programs like these make employers more desirable.

A positive feature of these benefits is the ease of administration. This is not a cafeteria or flexible spending plan and is not governed by the stringent requirements of Section 125. This program has no complicated forms or plan filing requirements, no use it or lose it rules, no irrevocable elections and no mandatory enrollment dates. Non-discrimination rules do not apply to these benefits and they are not subject to Form 5500 annual reporting. Employers can use payroll deduction procedures similar to those used for other pre-tax programs.

The primary cost of employer-based transit/vanpool benefits is the employer contribution to the employee’s transit or vanpool expenses. Although providing this benefit costs a company less than providing taxable salary, the cash flow needed to purchase passes or vouchers may be an issue for some companies.