Policy Brief: Transportation Spending Accounts
As noted in our policy brief: The Impact of Welfare Reform to Employers, the Transportation Equity Act for the 21st Century (TEA-21) permits employers to receive tax benefits for providing certain types of employee transportation benefits called "Qualified Transportation Fringes". Under TEA-21, effective January 1, 1998, employers have been able to let employees set aside up to $65 a month, $780 a year, of their salary before taxes to pay for transit and vanpool commuting, and qualified parking expenses up to $175 a month, or $2,100 a year. The transit allowance will increase to $100 a month effective January 1, 2002. Since the amount of the employee's salary used for this purpose is not taxed, a tax savings of over 30% over the cost of a similar take-home salary increase, incentive or bonus may be possible. This can result in a monetary savings of over $200 a year if the maximum of $780 is set aside. In addition, the employer saves money by reducing payroll costs since the amount set aside is exempt from employer paid payroll taxes (at least 7.65%) and contributions into 401 (k) accounts, a combined savings of about 10% on average. Employers incur no cost in offering the pre-tax benefit, and often find this type of program very easy to set up and administer.
(NOTE: We have obtained substantial documentation from numerous reliable tax and legal sources on behalf of our clients assuring that employers have been able to use this enabling legislation to set up these tax-offsets since the dates specified in TEA-21. Many, many employers small and large have done so without any IRS complications whatsoever, providing they have not sought retroactive credits when a formal Transportation Demand Management (TDM) program did not exist within their company. We have actually helped some businesses set up such programs with great success. Others have been, in our opinion, unnecessarily cautious without need, awaiting formal policy guidance from the IRS. For those employers, we offer this update.)
The following is an extract of an article was printed in the October edition of Entrepreneur Magazine. The entire article covered two aspects of proposed changes in IRS regulations. Only the text pertaining to transportation spending accounts is included here. If you wish to see the entire article, you can go directly to the article in Entrepreneur Mgazine at: The Killer Commute
The Killer Commute: Is it costing your employees a fortune? A new program may ease their burden.
By Joan Szabo, Entrepreneur Magazine, October, 2000
Washington is at work on two new federal tax proposals that will undoubtedly have impacts on your business. One comes from the IRS and the other from Congress.
The IRS proposal is designed to encourage employers to establish transportation spending accounts. Similar to the day-care and health-care expense accounts employers now set up for their workers, these accounts would allow employees to set aside pre-tax money to pay for some of their commuting costs.
Under the IRS proposal, employees could set aside up to $65 per month for both van-pooling expenses and transit fares, and up to $175 per month for parking costs. Through these accounts, employees receive reimbursement for their parking or transit fares and don't have to pay taxes on that amount.
For example, a commuter with $240 in monthly parking and transit expenses may be able to save $750 to $900 in taxes per year, depending on the tax bracket. "This adds up to a tremendous savings for employees," says Bonnie Whyte of the Employers Council on Flexible Compensation (ECFC), an association representing 2,800 employers nationwide. It's a welcome idea to employers as well. Though business owners are allowed to pay for employee transit fares and parking, few employers currently provide this benefit because of the cost.
The cost to an employer of setting up and administering the proposed program should be minimal, as long as it's done within the company, says John Hickman, a partner in the Atlanta office of the law firm Alston & Bird LLP and chairman of ECFC's technical advisory committee. With day-care and health-care accounts, companies often use third-party administrators because such programs involve a level of expertise not available in most companies, but that option is obviously expensive. The individual who does your company's billing and payroll should be able to handle the transportation account, according to Hickman.
As a way to encourage employers to sign up for the program, the IRS will allow them to establish and operate transportation savings accounts without written plans, which are normally required when companies set up new fringe benefits. In addition, the program would allow workers to carry into the next year any unused portions of their monthly allotments. With health-care and day-care spending accounts, employees are required to use what is in their accounts by the end of the year or forfeit any funds that have not been spent by that time.
The proposed rule would also simplify record-keeping requirements to some extent. For example, workers could show receipts for parking or transit costs if they are available; and if they aren't, employees would still be able to sign a statement indicating that they have incurred the costs.
The new proposal "would be ideal for small to midsized companies," says Whyte. "It would work especially well in urban areas with expensive parking where large numbers of people take public transportation."
One issue that still must be clarified by Washington has to do with the effect these proposed transportation accounts would have on pensions. Unfortunately, lawmakers did not indicate whether reducing workers' pay for tax purposes to provide the transportation benefit also lowers it when calculating retirement benefits.
Whyte says she expects clarification on that issue either from the IRS or Congress. She predicts the rule will be finalized by the end of the year.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.
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Additional information contact source: Employers Council on Flexible Compensation, www.ecfc.org