Employee Rights to Commuter Tax Savings

Employee Rights to Commuter Tax Savings

New Jersey now requires, by law, employers to offer their employees an opportunity to pay part of their commuting costs in pre-tax dollars.

Under a new state law, all employers with 20 or more employees must, provide employees, as a “fringe benefit” the opportunity to use “pre-tax dollars” to pay for ride sharing charges or public transportation passes. For unionized workers, the employers must add those benefits to new collective bargaining agreements. The statute uses the same definition of “employer” as the New Jersey unemployment benefit statute, and so may not be beneficial to commuters to other states, if their employer only pays into that other state systems. Nor does the statute apply to firms which only retain independent contractors.

The New Jersey statute is designed to ensure the maximum number of New Jersey citizens take advantage of Sec. 132(f) of The Internal Revenue Code. This provision allows employers to offer nontaxable qualified transportation fringe (QTF) benefits including mass transit benefits, van pools, qualified parking, and some other commuter benefits. The IRS allows QTF benefits to be provided directly to employees as tax-free benefits (free parking, free transit passes, reimbursements for parking, etc.), or the employee can pay for the benefits tax-free using a salary reduction arrangement. Those benefits are exempt from federal income tax. The benefit amount is also exempt from both the employers’ and the employees’ federal payroll taxes such as Medicare taxes. Unlike the New Jersey statute, the IRS does not limit its QTF program to employers with 20 or more employees.

The tax benefits can be fairly substantial for employees with long public transportation commutes. Transit pass and van pool benefits are limited to an inflation-adjusted maximum amount ($260 per month for 2018 and $265 per month for 2019), and qualified parking is subject to a separate limit of the same amount. For employees who need to park at a train station or bus stop, the parking fees can be funded with pre-tax dollars up to an additional $265 per month. Parking costs for qualified ride sharing vans may also be eligible. The New Jersey statute requires that the employer offer the fringe benefit up to the maximum deduction allowed by federal law, so as the federal benefit increases for inflation, the employer must raise the amount.

Under the New Jersey statute, an employer who doesn’t offer the pre-tax option, can be subject to fines. An employer “shall” be liable for a civil penalty of between $100 and $250 for a first violation, but will have a 90 day grace period to institute the pre-tax transportation fringe benefit before the civil penalty is imposed. After 90 days, each additional 30-day period in which an employer fails to offer a pre-tax transportation fringe benefit shall be subject to a $250 for each subsequent 30 day period in which the employer still fails to provide the option.