A Qualified Transportation Fringe Benefit (commuter account) is an employer-sponsored benefit program under Internal Revenue Code § 132(f) (Code) that allows employees to pay for qualified mass transit, commuter highway vehicle, and parking expenses incurred during their commute to work with pre-tax dollars. Employers may provide employees with any one or more of these benefits at the same time. This type of benefit is often called a commuter/transportation flexible spending arrangement.

Qualified transportation benefits can be provided directly by the employer or through a bona fide reimbursement arrangement. A bona fide reimbursement arrangement requires an employee to incur and substantiate expenses for qualified transportation benefits before reimbursement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item an employee can exchange only for a transit pass is not readily available for direct distribution to employees by the employer. A voucher is readily available for direct distribution if an employer can obtain it from a voucher provider that does not impose fare media charges or other restrictions preventing the employer from obtaining vouchers.

As of 2018, the Tax Cuts and Jobs Act of 2017 eliminated the employer tax deduction for qualified transportation benefits. The employer deduction is disallowed regardless of whether the benefits are paid directly by the employer, through a bona fide reimbursement arrangement, or through a compensation reduction agreement.

Several states and localities have adopted laws requiring employers to provide transportation benefits to employees. State-level requirements are covered here, but employers should consult the laws of the various state and localities in which they operate to ensure they meet all applicable requirements.

Plan Designs

The three primary types of qualified transportation plan designs are:

  • Giveaway plan in which the employer contributes to the employee’s benefits up to a specified maximum amount. This design is typically used for bicycle commuting benefits, as these expenses are no longer considered qualified transportation fringe benefits;
  • Pre-tax compensation reduction plan in which employees pay all the costs on a pre-tax basis through the use of compensation reduction agreements; and
  • Combination plan that includes employer (giveaway) contributions, pre-tax contributions, after-tax contributions, cash-outs, or a combination of those features.

A compensation agreement can be used with a bona fide reimbursement. Employers that want to provide employees with the ability to make pre-tax contributions to the qualified transportation benefit plan should have a written compensation agreement (often called a salary reduction agreement) in place.

The Code does not require qualified transportation fringe benefit plans to be documented in writing; however, a written document may be required under applicable state wage withholding laws. Employers may choose to document their plan to describe eligibility and other requirements, avoiding constructive receipt issues. Having a written document provides a straightforward way of communicating the terms of the plan to employees.

If a plan fails to comply with the Code’s requirements, the employer and the employee may lose the favorable tax treatment, and the benefit will be treated as taxable wages.

Eligibility

Any employer can sponsor a qualified transportation fringe benefit plan regardless of their size. Eligible employers include corporations (Subchapter S or Subchapter C), partnerships, nonprofit organizations, government entities, limited liability companies (LLCs), limited liability partnerships (LLPs), and sole proprietorships. Businesses under common control or that are part of an affiliated service group (controlled groups) may sponsor a single plan for all their employees.

Employees who are currently employed at the time the qualified transportation fringe benefit is provided are eligible to participate.

Participation

Coverage in a pre-tax compensation reduction plan may begin immediately after the initial election is made, or—more commonly—it may wait until the beginning of the next regular (usually monthly) coverage period.

Common circumstances under which participation in a qualified transportation fringe benefit plan will end include:

  • Participant in a giveaway plan remains an employee but ceases to be eligible for employer-sponsored benefits. Participation ends as determined by plan design, typically immediately.
  • Participant in a pre-tax compensation reduction plan remains an employee but ceases to be eligible to elect compensation reductions. Employers may choose to delay the end of participation until the participant has exhausted all unused compensation reduction amounts or may end participation immediately.
  • Participant ceases to be an employee. Participation ends immediately upon termination, as determined by law.

Handling Unused Transportation Funds

A plan may offer a run-out period in any of the above situations involving termination of participation. During the run-out period, qualified expenses incurred or paid during participation may still be submitted for reimbursement.

Plans may also be designed to allow participants who remain employed to carry over unused funds from one month to subsequent months if the funds are used solely for qualified transportation fringe benefits.

However, when an employee participating in a compensation reduction plan ceases to be an employee, any unused funds that cannot be reimbursed during the run-out period (if one is available) cannot be refunded to the former employee. Qualified transportation fringe benefit plans operate under a “use-it or lose-it” rule, and cash refunds are prohibited.

Contribution Limits and Eligible Expenses

Any employer may contribute to the plan but is not required to. An employer contribution does not increase the maximum monthly reimbursement for eligible qualified transportation expenses, as follows:

  • Mass transit is a mass transit vehicle publicly or privately operated and includes bus, rail, or ferry. Eligible expenses include transit passes, tokens, farecards, vouchers, or similar items required to ride a mass transit vehicle to or from work. The 2023 IRS limit for combined mass transit and vanpooling is $300 per month.
  • Commuter highway vehicle (vanpooling) is a highway vehicle with the seating compacity of at least six adults (not including the driver), and at least 80% of the vehicle mileage is used for transporting employees between their homes and workplace using at least ½ of the vehicle’s seating capacity (not including the driver’s seat). The 2023 IRS limit for combined mass transit and vanpooling is $ $300 per month.
  • Qualified parking is parking provided to an employee on or near their workplace or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or carpool. Qualified out-of-pocket expenses include parking fees for parking meters, garages, and lots. A parking facility or space located on or near property used by the employee for residential purposes is not considered qualified parking. The 2023 IRS limit for qualified parking expenses is $300 per month.

State Requirements

Several states have adopted laws requiring employers to provide transportation benefits to employees.

California

The California Parking Cash-Out Program is a state law that requires employers with 50 or more employees providing subsidized parking for their employees to offer the option of taking a cash allowance instead of a parking space, equivalent to the parking subsidy the employer would otherwise pay to provide the employee with a parking space. For more detailed information, see California Parking Cash-Out Program.

District of Columbia

The Sustainable DC Omnibus Amendment Act of 2014 requires employers with 20 or more employees to offer at least one of the following three commuter benefit options to their employees:

  • Pre-tax commuter benefits;
  • Subsidized commuter benefits; or
  • Employer-provided transportation.

To qualify, employees must perform 50% or more of their work in the District of Columbia.

The Transportation Benefits Equity Amendment Act of 2020 (aka the DC parking cash-out law) amended the Sustainable DC Omnibus Amendment Act of 2014 and requires covered employers that offer parking benefits to any employees to offer those employees a clean air transportation fringe benefit, pay a clean air compliance fee, or successfully implement a transportation demand management (TDM) plan, and requires covered employers to submit reports.

For detailed information, see District of Columbia Commuter Benefits.

New Jersey

The New Jersey Pre-Tax Transportation Fringe Benefit requires all employers with 20 or more employees not covered by a collective bargaining agreement to offer pre-tax commuter benefits to their employees. Tax-exempt employers are excluded. Employees must work, on average, 10 hours or more per week in New Jersey to be eligible for commuter benefits; they do not have to live in the state. For more detailed information, see New Jersey Pre-Tax Transportation Fringe Benefit.

Rhode Island

The Rhode Island Parking Cash-Out Program is a state law requiring employers to offer a free Rhode Island Public Transit Authority (RIPTA) transit pass instead of a parking space. The law applies to employers that meet the following criteria:

  • Are located within ¼ mile of a RIPTA bus line;
  • Have 50 or more employees;
  • Have leased parking; and
  • Subsidize employee parking by paying the cost and allowing the employee free or reduced-rate parking.

For more detailed information, see Rhode Island Parking Cash-Out Program.

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