Getting a Free Ride - Saving Employees Money
Long lines at the gas pumps and fuel rationing are painful memories of what happened in the 1970s when there was insufficient gasoline to meet demand. Vehicles have become more fuel-efficient in the past two decades, yet since the 1970s there are 50% more of them on the road, placing an even greater demand on limited fuel supplies. While it's highly unlikely that supplies will fall so low that rationing becomes an issue, the $2.00 and higher price per gallon many parts of the nation are currently seeing speaks to a continuing problem, if not a crisis of 1970s' proportions, in gasoline supply that will have serious and continuing financial consequences for our employees. This situation should encourage employers to proactively seek ways to help their employees deal with increasing commuting costs by instituting tax-favored transportation benefit plans or other cost-saving initiatives.
Cash or Carry
The Transportation Equity Act for the 21st Century amended Internal Revenue Code §132(f) to make qualified transportation expenses more affordable to employees while giving employers a welcome tax break. An employer can reimburse employees up to certain limits for certain transportation expenses on a tax-free basis (or pay the expenses directly itself) or offer employees the option of taking tax-free qualified transportation benefits or an equivalent amount of cash as additional compensation. In the latter case, employees are taxed only to the extent they exercise the cash option.
There are two basic categories of qualified transportation fringe benefit: (1) van pooling and transit passes and (2) qualified parking.
On the Bus or in the Pool
Employers can provide employees with up to $65 per month — in cash (if the expense is substantiated) or in kind — in qualified commuting benefits. A "qualified" benefit includes: transit passes, tokens, fare cards, vouchers, or similar items that entitle the employee to transportation on mass transit facilities; or transportation in a commuter highway vehicle eligible for use in van pooling.
Employers can: pay for the transit passes themselves and treat the amount as a business expense; allow employees to use pretax income of up to $65 per month (up to $100 beginning Jan. 1, 2002) to pay for transit fares themselves; or utilize a combination of both of these options.
Employers can subsidize on a tax-exempt basis the cost up to $65 per month (up to $100 effective Jan. 1, 2002) for an employee to commute to and from work via a van pool. To qualify, the vehicle used must be a "commuter highway vehicle" with a capacity of six or more adults (excluding the driver) used for at least 80% of its mileage to transport employees to and from work.
The $65 monthly limit represents the combined value of transit and van pool benefits provided an employee, not the individual value of each.
Thanks a Lot
Employers can also provide their employees, in cash or in kind, with up to $175 per month on a tax-exempt basis (increasing to $200 in 2002) to cover the costs of parking on or near the business premises of the employer or for parking provided on or near a location from which the employee commutes to work by mass transit, van pooling in a commuter highway vehicle, or car pool. This $175 is in addition to the $65 per month in transit/van pooling benefits, so that the total qualified benefit an employer may provide each employee per month is $240 (increasing to $300 in 2002).
Any of these benefits — transit passes, van pooling, parking — provided in amounts not exceeding the statutory monthly limits in §132(f) are not considered wages for FICA, FUTA, and federal income tax purposes. Employer-paid amounts exceeding these limits are reportable as taxable compensation on Form W-2. State and local tax treatments may vary.
Other Options
Beyond the §132(f) benefits, there are other ways in which employers can encourage or enable employees to save transportation costs, including:
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Carpooling.
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Telecommuting.
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Shorter workweeks.
Four-day workweeks could cut transportation costs by 20%. Why drive to work at all if all you're going to do there is write memos, develop plans, or talk to customers when these activities can be conducted just as effectively from home? According to a recent American Automobile Association survey, employees who commute 50 miles a day could incur a cost of over $5,102 per year by driving alone. That expense can be reduced to $2,500 with a two-person carpool and to $1,049 if four people participate.
Getting Started
To start your own transportation-benefits program, I recommend the following initial steps:
(1) Evaluate the demographics of how employees commute to work so you know you're providing the benefits they really need (not the ones you just think they need). Do most of them drive or take mass transit? If the former, is there much free parking available near the office? Would many employees take advantage of a van pool if it were offered? Is telecommuting an option for your employees and would they participate in a program?
(2) Focus on the 3 Cs — Cost, Convenience, and Conservation — and how everyone benefits, the company through possible tax breaks from pretax deferrals and from increased worker morale, as well as the employee.
(3) Set up a focus team to evaluate the options and offer suggestions.
(4) Decide on the top three alternatives and go with them.
© 2008 Thomson/RIA. All rights reserved.
