If you’re looking for a free or low-cost way to boost your employee benefit package, a transportation spending account may be the way to go. These programs involve some administrative burdens, but they can result in income tax savings for employees and FICA tax savings for both you and your workers. Until now, many employers have been reluctant to set up these accounts because federal regulations on them were unclear. However, the IRS recently proposed new rules that eliminate some of the confusion.
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What’s Covered
Federal law permits you to pay up to $240 of an employee’s commuting costs per month without having to include the benefits as part of the worker’s taxable income. But a little-known provision also allows you to offer workers transportation tax breaks without footing the bill yourself. This can be done by creating transportation spending accounts for workers through compensation reductions. Employees with transportation spending accounts can have a maximum of $175 withheld from their gross pay each month to pay for parking. They also can have $65 a month withheld for vanpooling expenses or to purchase transit passes. Proposed legislation would boost the monthly cap on vanpooling and transit passes to $175. Only these commuting expenses qualify for transportation spending accounts:
- Parking. The parking must be located on or near your business premises or at a commuter pick-up location, such as a mass transit parking lot.
- Vanpools. The employee has to commute in a vehicle that seats at least six adults plus the driver. At least 80% of the vehicle’s mileage must be used to transport employees between their homes and workplace, with employees taking up at least half the adult seating.
- Transit passes. These are tokens, fare cards, vouchers or similar items that either: 1) entitle employees to transportation on mass transit facilities, or 2) are provided by someone in the business of transporting people for compensation in a highway vehicle.
Administering Transportation Plans
The proposed rules lay out the details of implementing a transportation spending account:
- Plan format. A transportation plan cannot be part of a cafeteria plan but must stand alone.
- Election requirements. Employees would have to elect in writing (or electronically) to have their monthly earnings reduced by a fixed dollar amount or a set percentage.
- No refunds. Employees can’t cash out unused payroll reductions, but they could carry the unused amount over to a subsequent period. However, workers whose employment terminates would forfeit their account balances.
- Reimbursement procedures. You would reimburse employees for parking and vanpooling from their accounts if they prove that they paid the expense, for example, with a receipt or a written declaration that the cost was incurred. The purchase of transit passes can be difficult to substantiate because many transit agencies don’t issue receipts. So the regulations require that you purchase the passes and distribute them to employees unless the administrative cost to you exceeds specific IRS limits. In such cases, you would be able to reimburse employees directly.
- Pension overlap. The proposed rules don’t say whether you must include the transportation reduction in the employee’s earnings for purposes of calculating their retirement benefits. Consult an expert for advice on how to handle this issue.
Proposal’s Status
The IRS has scheduled a hearing on June 1, 2000, in Washington, D.C., to discuss the regulations.