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Benefit Levels
For calendar year (CY) 2001, the monthly tax-free limit for transit passes is $65; for commuter highway vehicles (vanpools), the limit is $65; and for qualified parking, $180. In CY 2002, the monthly tax-free limit for transit passes and vanpools will increase to $100. Changes in the Consumer Price Index (CPI) may increase the parking limit in CY 2002 and all limits in CY 2003 and beyond. Increases triggered by CPI changes occur in $5 increments.
Cash Out
Employers may establish a parking cash out program whereby employees may choose to cash out the value of employer-provided parking, forego parking, and receive the taxable cash value of the parking, or receive a tax-free transit or eligible vanpool benefit up to $65 per month (up to $100 per month in 2002). The employer transfers its expenditure for the parking space, assuming it is leased, to a direct payment to the employee. If the employee accepts the cash value rather than a tax-free transit or vanpool benefit, then the employee also incurs payroll and income taxes on the amount. The employer only incurs payroll taxes on the cash value provided. This additional taxable salary will allow the employee to finance other commuting modes that are not considered qualified transportation fringe benefits, such as walking, bicycling, carpooling, roller blading, or other means of commuting to work.
Cash Reimbursements
(a) The term qualified transportation fringe includes cash reimbursement by an employer to an employee for expenses incurred or paid by an employee for transportation in a commuter highway vehicle or qualified parking. The term qualified transportation fringe also includes cash reimbursement for transit passes made under a bona fide reimbursement arrangement, but in accordance with 26 USC section 132(f)(3), only if permitted under paragraph (b). The reimbursement must be made under a bona fide reimbursement arrangement, which meets the rules of paragraph (c). A payment made before the date an expense has been incurred or paid is not a reimbursement. In addition, a bona fide reimbursement arrangement does not include an arrangement that is dependent solely upon an employee certifying in advance that the employee will incur expenses at some future date. (b) Special rule for transit passes--(1) In general. The term qualified transportation fringe includes cash reimbursement for transit passes made under a bona fide reimbursement arrangement, but, in accordance with 26 USC section 132(f)(3), only if no voucher or similar item that may be exchanged only for a transit pass is readily available for direct distribution by the employer to employees. If a voucher is readily available, the requirement that a voucher be distributed in-kind by the employer is satisfied if the voucher is distributed by the employer or by another person on behalf of the employer (for example, if a transit operator credits amounts to the employee's fare card as a result of payments made to the operator by the employer). (2) Voucher or similar item. For purposes of the special rule in paragraph (b), a transit system voucher is an instrument that may be purchased by employers from a voucher provider that is accepted by one or more mass transit operators (e.g., train, subway, and bus) in an area as fare media or in exchange for fare media. Thus, for example, a transit pass that may be purchased by employers directly from a voucher provider is a transit system voucher. (3) Voucher provider. The term voucher provider means any person in the trade or business of selling transit system vouchers to employers, or any transit system or transit operator that sells vouchers to employers for the purpose of direct distribution to employees. Thus, a transit operator might or might not be a voucher provider. A voucher provider is not, for example, a third-party employee benefits administrator that administers a transit pass benefit program for an employer using vouchers that the employer could obtain directly. (4) Readily available. For purposes of this paragraph (b), a voucher or similar item is readily available for direct distribution by the employer to employees if and only if an employer can obtain it from a voucher provider that-- (i) does not impose fare media charges that cause vouchers to not be readily available as described in paragraph (b)(5); and (ii) does not impose other restrictions that cause vouchers to not be readily available as described in paragraph (b)(6). (5) Fare media charges. For purposes of paragraph (b)(4), fare media charges relate only to fees paid by the employer to voucher providers for vouchers. The determination of whether obtaining a voucher would result in fare media charges that cause vouchers to not be readily available as described in this paragraph (b) is made with respect to each transit system voucher. If more than one transit system voucher is available for direct distribution to employees, the employer must consider the fees imposed for the lowest cost monthly voucher for purposes of determining whether the fees imposed by the voucher provider satisfy this paragraph. However, if transit system vouchers for multiple transit systems are required in an area to meet the transit needs of the individual employees in that area, the employer has the option of averaging the costs applied to each transit system voucher for purposes of determining whether the fare media charges for transit system vouchers satisfy this paragraph. Fare media charges are described in this paragraph (b)(5), and therefore cause vouchers to not be readily available, if and only if the average annual fare media charges that the employer reasonably expects to incur for transit system vouchers purchased from the voucher provider (disregarding reasonable and customary delivery charges imposed by the voucher provider, e.g., not in excess of $15) are more than 1 percent of the average annual value of the vouchers for a transit system. (6) Other restrictions. For purposes of paragraph (b)(4), restrictions that cause vouchers to not be readily available are restrictions imposed by the voucher provider other than fare media charges that effectively prevent the employer from obtaining vouchers appropriate for distribution to employees. Examples of such restrictions include-- (i) Advance purchase requirements. Advance purchase requirements cause vouchers to not be readily available only if the voucher provider does not offer vouchers at regular intervals or fails to provide the voucher within a reasonable period after receiving payment for the voucher. For example, a requirement that vouchers may be purchased only once per year may effectively prevent an employer from obtaining vouchers for distribution to employees. An advance purchase requirement that vouchers be purchased not more frequently than monthly does not effectively prevent the employer from obtaining vouchers for distribution to employees. (ii) Purchase quantity requirements. Purchase quantity requirements cause vouchers to not be readily available if the voucher provider does not offer vouchers in quantities that are reasonably appropriate to the number of the employer's employees who use mass transportation (for example, the voucher provider requires a $1,000 minimum purchase and the employer seeks to purchase only $200 of vouchers). (iii) Limitations on denominations of vouchers that are available. If the voucher provider does not offer vouchers in denominations appropriate for distribution to the employer's employees, vouchers are not readily available. For example, vouchers provided in $5 increments up to the monthly limit are appropriate for distribution to employees, while vouchers available only in a denomination equal to the monthly limit are not appropriate for distribution to employees if the amount of the benefit provided to the employer's employees each month is normally less than the monthly limit. (c) Substantiation requirements. Employers that make cash reimbursements must establish a bona fide reimbursement arrangement to establish that their employees have, in fact, incurred expenses for transportation in a commuter highway vehicle, transit passes, or qualified parking. For purposes of 26 USC section 132(f), whether cash reimbursements are made under a bona fide reimbursement arrangement may vary depending on the facts and circumstances, including the method or methods of payment utilized within the mass transit system. The employer must implement reasonable procedures to ensure that an amount equal to the reimbursement was incurred for transportation in a commuter highway vehicle, transit passes, or qualified parking. The expense must be substantiated within a reasonable period of time. An expense substantiated to the payor within 180 days after it has been paid will be treated as having been substantiated within a reasonable period of time. An employee certification at the time of reimbursement in either written or electronic form may be a reasonable reimbursement procedure depending on the facts and circumstances. Examples of reasonable reimbursement procedures are set forth in paragraph (d) of Q/A-16 of the final IRS regulation dated January 11, 2001.
Commuter Choice
Commuter Choice is the name given to benefits that employers can offer employees that encourage them to commute to work by methods other than driving alone. They may include "qualified transportation fringes" under IRS rules (transit and vanpool vouchers and passes and qualified parking), biking, walking, teleworking, roller blading, etc.
Commuter Highway Vehicle
Transportation in a commuter highway vehicle is transportation provided by an employer to an employee in connection with travel between the employee's residence and place of employment. A commuter highway vehicle is a highway vehicle with a seating capacity of at least 6 adults (excluding the driver) and with respect to which at least 80 percent of the vehicle's mileage for a year is reasonably expected to be-- (a) For transporting employees in connection with travel between their residences and their place of employment; and (b) On trips during which the number of employees transported for commuting is at least one-half of the adult seating capacity of the vehicle (excluding the driver).
Comprehensive Energy Policy Act of 1992
The Comprehensive Energy Policy Act of 1992 (Public Law 102-486) established vanpool (commuter highway vehicle) tax free benefits of up to $60 per month (2001 limit is $65); raised the monthly tax free limit on transit passes from $21 to $60 (2001 limit is $65), capped monthly tax free parking at $155 (2001 limit is $180), and provided for changes to these tax free limits based on changes to the CPI.
Eligibility
(a) General rule. 26 USC Section 132(f)(5)(E) states that self-employed individuals who are employees within the meaning of section 401(c)(1) are not employees for purposes of section 132(f). Therefore, individuals who are partners, sole proprietors, or other independent contractors are not employees for purposes of section 132(f). In addition, under section 1372(a), 2-percent shareholders of S corporations are treated as partners for fringe benefit purposes. Thus, an individual who is both a 2-percent shareholder of an S corporation and a common law employee of that S corporation is not considered an employee for purposes of section 132(f). However, while section 132(f) does not apply to individuals who are partners, 2-percent shareholders of S corporations, or independent contractors, other exclusions for working condition and de minimis fringes may be available as described in paragraphs (b) and (c). See Internal Revenue Code Secs. 1.132-1(b)(2) and 1.132-1(b)(4). (b) Transit passes. The working condition and de minimis fringe exclusions under 26 USC section 132(a)(3) and (4) are available for transit passes provided to individuals who are partners, 2-percent shareholders, and independent contractors. For example, tokens or farecards provided by a partnership to an individual who is a partner that enable the partner to commute on a public transit system (not including privately-operated van pools) are excludable from the partner's gross income if the value of the tokens and farecards in any month does not exceed the dollar amount specified in Sec. 1.132-6(d)(1). However, if the value of a pass provided in a month exceeds the dollar amount specified in Sec. 1.132-6(d)(1), the full value of the benefit provided (not merely the amount in excess of the dollar amount specified in Sec. 1.132-6(d)(1)) is includible in gross income. (c) Parking. The working condition fringe rules under 26 USC section 132(d) do not apply to commuter parking. See Sec. 1.132-5(a)(1). However, the de minimis fringe rules under section 132(e) are available for parking provided to individuals who are partners, 2-percent shareholders, or independent contractors that qualifies under the de minimis rules. See Sec. 1.132-6(a) and (b).
Federal Employees Clean Air Incentives Act of 1993
The Federal Employees Clean Air Incentives Act of 1993 (Public Law 103-172; 5 USC 7905) made permanent the Federal participation in a pilot transit benefit program, allowing Federal agencies to establish programs to encourage non single-occupancy vehicle travel to work. This includes the provision of transit passes, bicycle facilities, and non-monetary incentives.
Federal Employees Eligibility
Under Executive Order 13150, Federal Workforce Transportation, effective October 1, 2000, all Federal employees in the National Capital Region (NCR) will receive a benefit equal to their commuting costs, not to exceed $65, in the form of passes or vouchers such as Metrochek, purchased by the agency with appropriated funds. As part of a 3 year pilot program, all employees nationwide of the Departments of Transportation (DOT) and Energy (DOE) and the Environmental Protection Agency (EPA) will also receive these same benefits, purchased with agency appropriated funds.
Federal employees located outside the NCR will be permitted to reduce their pre-tax income by an amount equal to their transit or vanpool expenses up to a maximum of $65 per month. The employing agency will accumulate these withholdings and purchase the vouchers, passes, or fare media on behalf of the employee, and then distribute this fare media directly to the participating employees.
See 5 U.S.C. 7905 and 5 U.S.C. 2105 for a complete definition of Federal employees. In some cases, your agency's appropriations acts may further define employees for purposes of this program (e.g., National Institutes of Health, P.L. 105-277).
Monthly Limits
(a) The value of transportation in a commuter highway vehicle, transit passes, and qualified parking is calculated on a monthly basis to determine whether the value of the benefit has exceeded the applicable statutory monthly limit on qualified transportation fringes. Except in the case of a transit pass provided to an employee, the applicable statutory monthly limit applies to qualified transportation fringes used by the employee in a month. Monthly exclusion amounts are not combined to provide a qualified transportation fringe for any month exceeding the statutory limit. A month is a calendar month or a substantially equivalent period applied consistently. (b) Transit passes. In the case of transit passes provided to an employee, the applicable statutory monthly limit applies to the transit passes provided by the employer to the employee in a month for that month or for any previous month in the calendar year. In addition, transit passes distributed in advance for more than one month, but not for more than twelve months, are qualified transportation fringes if the requirements in paragraph (c) are met (relating to the income tax and employment tax treatment of advance transit passes). The applicable statutory monthly limit under 26 USC section 132(f)(2) on the combined amount of transportation in a commuter highway vehicle and transit passes may be calculated by taking into account the monthly limits for all months for which the transit passes are distributed. In the case of a pass that is valid for more than one month, such as an annual pass, the value of the pass may be divided by the number of months for which it is valid for purposes of determining whether the value of the pass exceeds the statutory monthly limit. (c) Rule if employee's employment terminates (1) Income tax treatment. The value of transit passes provided in advance to an employee with respect to a month in which the individual is not an employee is included in the employee's wages for income tax purposes. (2) Reporting and employment tax treatment. Transit passes distributed in advance to an employee are excludable from wages for employment tax purposes under Internal Revenue Code sections 3121, 3306, and 3401 (FICA, FUTA, and income tax withholding) if the employer distributes transit passes to the employee in advance for not more than three months and, at the time the transit passes are distributed, there is not an established date that the employee's employment will terminate (for example, if the employee has given notice of retirement) which will occur before the beginning of the last month of the period for which the transit passes are provided. If the employer distributes transit passes to an employee in advance for not more than three months and at the time the transit passes are distributed there is an established date that the employee's employment will terminate, and the employee's employment does terminate before the beginning of the last month of the period for which the transit passes are provided, the value of transit passes provided for months beginning after the date of termination during which the employee is not employed by the employer is included in the employee's wages for employment tax purposes. If transit passes are distributed in advance for more than three months, the value of transit passes provided for the months during which the employee is not employed by the employer is includible in the employee's wages for employment tax purposes regardless of whether at the time the transit passes were distributed there was an established date of termination of the employee's employment.
Parking
(a) Qualified parking is parking provided to an employee by an employer-- (1) On or near the employer's business premises; or (2) At a location from which the employee commutes to work (including commuting by carpool, commuter highway vehicle, mass transit facilities, or transportation provided by any person in the business of transporting persons for compensation or hire). (b) or purposes of 26 USC section 132(f), parking on or near the employer's business premises includes parking on or near a work location at which the employee provides services for the employer. However, qualified parking does not include the value of parking provided to an employee that is excludable from gross income under section 132(a)(3) (as a working condition fringe), or reimbursement paid to an employee for parking costs that is excludable from gross income as an amount treated as paid under an accountable plan. See Internal Revenue Code Sec. 1.62-2. (c) However, parking on or near property used by the employee for residential purposes is not qualified parking. (d) Parking is provided by an employer if the parking is on property that the employer owns or leases; the employer pays for the parking; or the employer reimburses the employee for parking expenses (see also "Cash Reimbursements").
Payroll Taxes
(a) Employment tax treatment generally. Qualified transportation fringes not exceeding the applicable statutory monthly limit of $65 for transit and vanpools in CY 2001 and $100 in CY 2002 and $180 for parking in CY 2001, are not wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and federal income tax withholding. Any amount by which an employee elects to reduce compensation is not subject to the FICA, the FUTA, and federal income tax withholding. Qualified transportation fringes exceeding the applicable statutory monthly limit are wages for purposes of the FICA, the FUTA, and federal income tax withholding and are reported on the employee's Form W-2, Wage and Tax Statement. (b) Employment tax treatment of cash reimbursement exceeding monthly limits. Cash reimbursement to employees (for example, cash reimbursement for qualified parking) in excess of the applicable statutory monthly limit under 26 USC section 132(f) is treated as paid for employment tax purposes when actually or constructively paid. See Internal Revenue Code Secs. 31.3121(a)-2(a), 31.3301-4, 31.3402(a)-1(b). Employers must report and deposit the amounts withheld in addition to reporting and depositing other employment taxes. See also "Cash Reimbursements." (c) Noncash fringe benefits exceeding monthly limits. If the value of noncash qualified transportation fringes exceeds the applicable statutory monthly limit, the employer may elect, for purposes of the FICA, the FUTA, and federal income tax withholding, to treat the noncash taxable fringe benefits as paid on a pay period, quarterly, semi-annual, annual, or other basis, provided that the benefits are treated as paid no less frequently than annually.
Qualified Transportation Fringes
A "qualified transportation fringe" is any of the following that is provided by an employer to an employee and meets IRS requirements: (1) transportation in a commuter highway vehicle, (2) transit passes, and (3) qualified parking. Nothing in 26 USC section 132(f) prohibits an employer from simultaneously providing an employee any combination of these three benefits.
Record Keeping
There are no substantiation requirements if the employer distributes transit passes. Thus, an employer may distribute a transit pass for each month with a value not more than the statutory monthly limit without requiring any certification from the employee regarding the use of the transit pass. See also "Cash Reimbursements."
Taxpayer Relief Act of 1997
The Taxpayer Relief Act of 1997 (Public Law 105-34) amended the Internal Revenue Code to permit employees to receive a parking benefit in lieu of salary or to receive a taxable salary equivalent instead of the parking benefit (cash out). These changes did not affect the tax-free treatment of existing parking benefit recipients.
Transit Passes
There are no substantiation requirements if the employer distributes transit passes. Thus, an employer may distribute a transit pass for each month with a value not more than the statutory monthly limit without requiring any certification from the employee regarding the use of the transit pass. A transit pass is any pass, token, farecard, voucher, or similar item (including an item exchangeable for fare media) that entitles a person to transportation-- (a) On mass transit facilities (whether or not publicly owned); or (b) Provided by any person in the business of transporting persons for compensation or hire in a highway vehicle with a seating capacity of at least 6 adults (excluding the driver).
Transportation Equity Act for the 21st Century
The Transportation Equity Act for the 21st Century (Public Law 105-178) among other things, amended the Internal Revenue Code to permit employees to receive tax free transit or vanpool benefits in lieu of compensation in the same manner as was done for parking under the Taxpayer Relief Act of 1997. It also raised the monthly tax-free limit for transit and vanpool benefits from $65 to $100 in CY 2002.
Vanpool Benefits
Transportation in a commuter highway vehicle is transportation provided by an employer to an employee in connection with travel between the employee's residence and place of employment. A commuter highway vehicle is a highway vehicle with a seating capacity of at least 6 adults (excluding the driver) and with respect to which at least 80 percent of the vehicle's mileage for a year is reasonably expected to be-- (a) For transporting employees in connection with travel between their residences and their place of employment; and (b) On trips during which the number of employees transported for commuting is at least one-half of the adult seating capacity of the vehicle (excluding the driver).
Vouchers
See "Cash Reimbursements" (b)(2).
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