A qualified transportation plan allows employees to pay for certain transportation expenses on a tax-advantaged basis. The expenses must be incurred for the purpose of commuting between the employee’s residence and regular place of employment. Benefits can be paid tax-free by the employer and/or through pre-tax employee contributions.
Qualified Transportation Expenses
Qualified transportation expenses are defined by the IRS in Code Section 132 and include expenses for transit passes, commuter highway vehicles, parking, and bicycle commuting.
Transit pass expenses include passes, tokens, farecards, or vouchers for mass transit such as train, bus, subway, or ferry. Employers are required to provide transit vouchers, such as the SmarTrip card in DC, where readily available.
Commuter Highway Vehicles (Van Pool)
A commuter highway vehicle must have a seating capacity of at least six adults (excluding the driver). In addition, 80% of the vehicle’s annual mileage must be for transporting employees to and from work and employees must fill at least half of the seating capacity. Van pool expenses are subject to a combined benefit limit with transit pass expenses.
Parking expenses include parking provided on or near the employee’s regular place of employment or parking at a location from which the employee commutes to his/her regular place of employment, such as a Metro parking facility.
Bicycle commuting expenses are for the purchase, repair, and storage costs of a bicycle regularly used for commuting purposes. Individuals receiving bicycle commuting benefits cannot receive transit, parking, or van pool benefits. Only employer-paid benefits are permitted.
Effective January 1, 2019 through December 31, 2025: The bicycle benefit will be taxable income to employees, but will be the only qualified transportation expense that qualifies as a tax-deductible expense for employers.
Employees must make a monthly benefit election prior to the beginning of the benefit month. Employees must make separate elections for transit and parking benefits. Transit and parking benefits must be kept in separate accounts with no transfer of funds between each account.
Unlike cafeteria plan elections, an employee is able to change his or her transportation benefit elections on a monthly basis and any unused amounts in a given month can be carried forward to subsequent months. However, note that under DC’s SmartBenefits Program, unused benefits on a SmarTrip card will automatically be forfeited and returned to the employer each month unless the employer notifies SmartBenefits otherwise. If an employee ceases participation in the plan or terminates employment, then he or she will forfeit any unused amounts.
Reimbursement of Expenses
Reimbursement of qualified transportation expenses must be substantiated by receipts or a parking log and cannot exceed the employee’s election amount or the monthly benefit limits set by the IRS. Any reimbursement exceeding the IRS limits is taxable to the employee.
Qualified transportation plans are not subject to ERISA and are not required to be in writing. However, employers may want to prepare a written summary of the plan benefits, monthly election limits, and procedures for employee elections and reimbursements. Employers can administer the plan in-house or use an outside third party administrator (TPA). Many TPAs administer both flexible spending accounts (FSAs) and qualified transportation plans.
IRS Benefit Limits
Qualified transportation benefits (other than Bicycle during 2019-2015) are not subject to FICA, FUTA, or federal income tax up to the IRS monthly benefit limits (indexed annually):
|Transit and van pool (combined)||$ 265|
|Bicycle (employer funds only)||$ 20|
Any benefit reimbursement exceeding the IRS monthly benefit limits is taxable to the employee.