Pre-tax parking and transportation benefits.

Legislation enacted last year has expanded significantly the transportation benefits an employer can offer its employees on a tax-free basis.

Background

Sec. 132(f) defines a "qualified transportation fringe" as any of the following provided by an employer to an employee: (1) transportation in a commuter highway vehicle; (2) transit passes; and (3) qualified parking. A "commuter highway vehicle" is defined as any vehicle seating at least six adult passengers, when 80% of the mileage is for travel between the employees' residence and place of employment and at least half of the vehicle's adult seating capacity is used for employees on such trips. The term "transit pass" means any pass, token, farecard, voucher or similar item that entitles an employee to transportation on mass transit or in a vanpooling vehicle. "Qualified parking" is defined as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes by commuter highway vehicle, transit pass or carpool.

Prior to 1998, these transportation benefits were excludible only if an employee received the benefit in addition to (rather than in lieu of) regular compensation. If an employer offered its employees a choice between parking and cash compensation, the amount was taxable to the employees regardless of their choices.

The Taxpayer Relief Act of 1997 (TRA '97) amended Sec. 132(f), effective Jan. 1, 1998, to allow an employer to give its employees a choice between receiving taxable cash or tax-free parking benefits. The exclusion is not lost merely because an option for cash is offered; only when an employee chooses cash is the employee required to include that amount in income. This option was not available for transit passes and vanpool benefits under the TKA '97; these benefits continued to be exdudible only if provided in addition to (and not in lieu of) any compensation otherwise payable to an employee.

Impact of 1998 Legislation

In 1998, the Transportation Equity Act for the 21st Century further modified Sec. 132(f) to give transit and vanpooling benefits the same tax treatment as that afforded parking benefits in the TRA '97. Thus, the options an employer can offer its employees as an alternative to cash were expanded to include employer-provided transit passes and vanpooling as well. Accordingly, effective Jan. 1, 1998, no amount is includible in an employee's income or wages merely because the employee is offered a choice of cash and one or more qualified transportation benefits.

For 1999, the exclusion limits on these benefits are $175 per month for parking and $65 per month for vanpooling and transit passes combined. Beginning next year, these limits are subject to adjustment to reflect inflation. Beginning in 2002, the vanpooling and transit pass limit will be increased to $100 per month; thereafter, the $100 limit will be subject to adjustment for inflation. An employer may offer both parking and transit passes, for a total maximum monthly benefit of $240 for 1999, if employees drive from home to a central location and then take mass transportation to the employer's offices.

An employer must calculate the value of any benefits provided to an employee on a monthly basis to determine if the value exceeds the exemption. If the fair market value of a benefit is more than the limit for any month, the excess must be included in an employee's gross income and wages, unless the employee pays the difference. Any "unused" portion of the monthly exemption may not be carried over to subsequent months. The legislative history to the 1998 law states that the new provision does not change the rules for determining when a cash reimbursement for transit passes constitutes a qualified transportation fringe benefit.

Opportunities for Employer and Employees

Employer-sponsored qualified transportation benefit plans may provide a valuable tax saving opportunity for both employees and employers. Employees may be interested in purchasing parking or transit passes on a pre-tax basis (i.e., reducing their current salary to pay for such expenses). An employer would allow employees to reduce their compensation by the lesser of the value of the benefit or the applicable limit, and then act as purchasing agent for the employees. This approach has the significant advantage of not increasing an employer's costs (other than administrative costs) and saving both the employer and employee FICA and unemployment taxes. For example, an employee in the 28% tax bracket who elects to set aside $175 per month for parking will receive an annual tax-free benefit of $2,100 and save approximately $580 in Federal income tax and approximately $160 in employment tax (assuming the employee is under the FICA wage base).

An employer saves payroll taxes on the benefits (7.65% FICA, for employees under the FICA base ($72,600 in 1999), plus 1.45% Medicare tax for all employees, whether under or over the FICA wage base). If an employer provides the maximum tax-free parking benefit to 100 employees who earn less than the FICA wage base, the employer will save about $16,000 a year. If an employer provides the maximum allowable tax-free mass transit benefit to 100 employees who earn less than the FICA wage base, the employer will save about $6,000 a year. These savings may exceed the administrative costs of maintaining a program.

There are several important considerations that employers should address in deciding whether to implement this program (e.g., the effect on other benefit programs). Salary directed on a pretax basis to pay for transportation benefits would not be promulgated in the Social Security benefit base and could be excluded from compensation covered by other employer plans that base benefits on a percentage of pay. Note: The IRS has not promulgated regulations explaining how to implement a pre-tax qualified transportation fringe benefit plan.

FROM JENNIFER LOPEZ, CPA, WASHINGTON, DC