Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century (TEA-21) allows employers to offer employees the opportunity to set aside a portion of their salary in a Transit and Parking FSA to pay for certain transportation expenses. The employee will not be taxed on amounts set aside and used for qualified expenses (that is, pre-tax dollars are used to pay the commuting expenses).
Under IRS Section 132 and TEA-21 qualified transportation expenses generally include payments for the use of mass transportation (for example, train, subway, bus fares), and for parking (see further details below). For 2017 the maximum monthly pre-tax contribution for mass transit and van-pool is $255.00, and $255.00 for parking.
Since 1999, Core Documents has been providing employers with everything they need to successfully establish a IRS Section 132 Commuter Benefits Plans. Section 132(f) or the DOL does not require a formal plan document, however many employers prefer to define the new benefit in a plan document, summary plan description, and forms for their employees. For more information or an order form click on one of the links in the right side-bar regarding the $99 PDF or the $149 Deluxe Binder & PDF Section 132 kit for employers.
How Section 132 Works: The Transit and Parking FSA fringe benefit is similar to the pre-tax flexible spending accounts available for medical expenses and dependent care. One important difference, however, is the transportation benefit does not include a “use it or lose it penalty,” as is the case with medical/dependent care flexible spending accounts.
Before the start of the Section 132 plan year, individual employees elected to set aside a certain amount of pre-tax salary to cover qualified costs incurred in commuting to work. The employee will designate an amount (up to $255.00 per month) for mass transit expenses and a separate amount (up to $255.00 per month) for parking expenses — separate reimbursement accounts are maintained for each category, and funds cannot be commingled or transferred between accounts (for example, amounts cannot be transferred from the mass transit to the parking account).
As the employee incurs Section 132 expenses during the year, a request form may be submitted to the employer for reimbursement. If the employee does not use the full amount before the end of the program year, the left over amount is carried forward to the next year.
Who is Eligible Under Section 132: As a general rule, the Transit and Parking FSA fringe benefit can only be provided by employers to employees. Common law employees and officers of corporations are eligible (the law does not include non-discrimination requirements for the benefit). Sole proprietors, partners, independent contractors, and two-percent shareholders of S corporations are not eligible for this transportation fringe benefit.
Qualified Section 132 Expenses: Parking expenses that can be paid with pre-tax dollars include the costs of (1) parking a vehicle in a facility that is near the employee’s place of work, or (2) parking at a location from where the employee commutes to work (for example, the cost of parking in a lot at the train station so that the employee can continue his/her commute on the train). There is also a qualified bicycle commuting expense of $20 per month for qualified bicycle commuting reimbursement of expenses incurred during the year.
Qualified mass transit expenses include:
Transit passes for mass transportation to and from work. Qualified amounts include costs of any pass, token, fare card, voucher, or other item that entitles the employee to use mass transit for the purpose of traveling to or from his/her place of work. However, when a transit voucher program is readily available, Federal regulations prohibit the use of cash reimbursement as a way to provide transit benefits. Section 132(f) (3) states: Transit Benefits can include cash reimbursement to an employee as long as the reimbursement is for any transit pass, and a voucher or similar instrument which can be used to purchase the transit pass is not readily available for direct distribution to the employee.
The mass transit can be a public system, or a private enterprise provided by a company/individual who is in the business of transporting people in a “commuter highway vehicle.” Such a vehicle must have a seating capacity for six or more adults (not including the driver), and at least 80% of the of the vehicles’ mileage must be from transporting employees to and from their place of work. Additionally, the vehicle must be carrying at least three passengers (not including the driver). Commuter highway vehicles may be owned or leased by an employer to be used by employees or a third-party provider for transportation purposes. Employees can also own and operate commuter highway vehicles.
Qualified Transportation reimbursements for bicycle expenses was eliminated in 2013. See IRS Letter Number 2013-0032. “Under section 132(f)(1)(B), a qualified transportation fringe includes any transit pass. Under section 132(f)(5)(A), a “transit pass” is defined as any pass, token, fare card, voucher, or similar item (including an item exchangeable for fare media) that entitles a person to transportation on mass transit facilities(emphasis added) whether or not publicly owned. A bike share program is not a mass transit facility.”
Tax Savings: Federal income tax and social security (FICA) tax are not imposed on amounts set aside for IRS Section 132 qualified Transit and Parking FSA expenses. Depending on state law, individuals may also avoid state and local income taxes on earnings set aside. The federal tax savings can be as much as 35.65% (federal tax plus 7.65% FICA) or more than $2,000 annually if the maximum employee contributions are made to each reimbursement account ($510.00 monthly contribution — $255.00 for mass transit, plus $255.00 for parking).
The employee’s future social security benefits may be slightly lower because the amounts set aside for the Section 132 transportation costs are not subject to FICA tax. In most cases, this reduction in the social security wage base will have a nominal effect on future social security benefits.
These are some thoughts to consider about the Section 132 Transit and Parking FSA fringe benefits. Your financial adviser can also provide additional information and should be consulted before any action is taken.
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