COMMUTER CHOICE TAX BENEFITS AN EMPLOYER GUIDE

Transcription

1 COMMUTER CHOICE TAX BENEFITS AN EMPLOYER GUIDE Discover how to help your employees save $2,846 a year. And, employers save on taxes too!

2 Introduction In this guide to the Commuter Choice Tax Benefit Program, you ll learn how to easily help your employees save on their monthly commuting expenses while saving money for your company. With the new benefit limits starting in 2015, employers can continue to help employees reduce their annual commuting costs by $2,846 or more. This may result in savings up to 40 percent when they use transit, vanpools, and park at lots connected with these services. Even employees who regularly commute to work by bicycle can save money. Under the program, employers avoid payroll taxes on the amounts that employees use for their commuting expenses, saving hundreds of dollars per employee each year. It s a great program that can significantly benefit your company. Overview The Commuter Choice Tax Benefit Program is permitted under the federal Internal Revenue Code, Section 132(f) Qualified Transportation Fringe. 1 Under this tax provision, employees monthly expenses for commuting by transit or vanpools (up to $255) can be paid for on a tax- free basis. This means an employee may avoid taxes on up to $3,060 a year, a savings of $1,423 or more. Additionally, employees can save up to an additional $255 per month if they pay to park at commuter lots to travel by transit, vanpools or carpools. Together, that is a tax exclusion of up to $6,120 a year - a total savings of more than $2,846 per employee each year! With a Commuter Choice Tax Benefit Program, an employee may avoid taxes on up to $6,120 a year, a savings of $2,846 or more. Employers don t cover payroll taxes, such as Social Security and Medicare taxes (FICA), on the amount of the benefit yielding savings of up to $468 per employee per year. 2 Commuter Choice also allows employers to subsidize employees who commute to work by bicycle through a tax-free fringe or subsidy of $20 per month. Neither employers nor employees pay taxes on the amount of the benefit. Employees who qualify can cover their maintenance and equipment expenses with this benefit, helping them to stay healthy and fit. 1 See also Internal Revenue Bulletin published on November 18, Employer federal tax exclusion includes Social Security Tax of 6.2% and Medicare Tax of 1.45% (together referred to as FICA for a total tax of 7.65%) 1

3 How Does Commuter Choice Tax Benefits Work? The federal tax code lets employers provide employees with an income tax exclusion for expenses paid for with normally taxable salary or gross income for the following: 1. Transit Passes (Transit Services): Any publicly or privately operated transit service including buses, trains, subways, ferries, shuttles, and vanpools operated by such transit providers. 2. Commuter Highway Vehicles (Vanpools): Vehicles used for transporting employees from their home to work with seats for at least six passengers plus a driver, such as vanpools. Whether operated by or for an employer, or leased through a third party by an employee or group of employees Qualified Parking (Commuter Parking): Parking at or near a location from which an employee commutes to work by transit, vanpools and carpools, or parking near the location where an employee works. The tax provision also contains a separate exclusion for employees who regularly commute to work by bicycle. See details later in this guide. How much may be excluded from taxes? Starting in 2015, the exclusion is $255 per month for transit, vanpools, and an additional exclusion of up to $255 a month for commuter parking. Note that this amount varies from year to year. 4 There is a separate exclusion for bicycling of $20 per month for employees who don t use the transit, vanpooling or commuter parking benefits. 3 Additional requirements to qualify as a Commuter Highway Vehicle or vanpool include the reasonable expectation that a) 80% of the vehicle s mileage is for commuting between residences and the work locations, and b) at least ½ of passenger seats are filled on average. Treasury Regulation (b) (Q/A-2) 4 IRC Section 132(f)(6) contains a cost of living index in $5 increments. In addition, various acts of Congress have increased the changed limits from time to time. 2

4 Employers May Provide the Benefit in One of Three Ways: Employer Paid: Employers give employees up to $255 per month as a fringe benefit or subsidy. Employee Paid: Employees can exclude up to $255 (pretax) from their current salary to pay for eligible expenses. Employer Assistance: Employers provide a partial subsidy or fringe benefit to employees by allowing the employees to use their pretax salary to make up the rest of their expenses (up to the monthly limit). Options for Employee s $255 Monthly Transit Expenses Employer Paid Employee Paid Employer Assistance Employer Contribution Employee Pretax Salary $255 $100 $255 $155 Options for Employee s $255 Monthly Transit and $80 Commuter Parking Monthly Expenses Employer Paid Employee Paid Employer Assistance Employer Contribution Employee Pretax Salary $335 $150 $335 $185 3

5 What Are The Tax Savings? How do employers and employees save money with this benefit? Every tax situation is different, but to help you understand the savings opportunities, here are some examples of the possible savings with a pretax benefit for commuting. Example: Employee spends $100 monthly for parking at a BART station and $200 monthly to ride BART, a total of $300 in monthly commute costs. This costs the employee $3,600 in annual commuting costs. Employee earns $100,000/year Employee is in the 40% total tax bracket (federal and state taxes) 5 Example Employee Tax Savings Without Tax Benefit With Commuter Choice Monthly/Annual Savings Monthly Salary $8,333 $8,333 Pretax Benefit for Commuting ($300) Taxable Salary $8,333 $8,033 Withholding Taxes (40%) ($3,333) ($3,213) Monthly Commuting Costs ($300) Take Home Pay $3,033 $3,213 $180/$2,160 Example Employer Tax Savings per Employee Without Tax Benefit With Commuter Choice Monthly/Annual Savings Monthly Taxable Salary $8,333 $8,033 Withholding Taxes Paid by Employer (FICA-7.65%) $637 $614 $23/$276 5 The employee tax bracket in this example is composed of federal tax of 25%, FICA of 7.65% and the remaining amount due to state taxes. Employees should consult their own tax advisor to determine their actual tax savings. 4

6 A Flexible Benefit Many employers enjoy the flexibility of the program, and the minimal amount of paperwork required! Any size employer may offer the program No written plan is required Enrollment can occur at any time Not all benefits have to be offered; for example, a transit and vanpool benefit can be offered exclusively Employees can participate even if their commute varies daily Benefits do not lapse and may be used as long as an employee remains enrolled. It is important to note that not all employees are eligible to receive the benefit. Partners, two percent or more shareholders of chapter S corporations, and independent consultants and contractors are not eligible for this benefit. 6 Additionally, the Commuter Choice Benefit Plan cannot be made part of other benefit plans, including those under Internal Revenue Code Section 125 (Cafeteria Plans). These plans have different conditions and limitations. Employers may not co-mingle funds from the aforementioned plans with the Commuter Choice Tax Benefit funds. How do Employees Use the Benefit? There are many convenient and easy to use ways available to employees in the San Francisco Bay Area for redeeming their tax-free benefits. Most Commuter Choice Tax Benefit Programs take advantage of several of these products. Transit Passes a variety of tickets and passes from local transit operators can be distributed to participating employees and paid for with tax-free benefits. Employees who use the Clipper card can have their tax-free benefits deposited into their card accounts. Vouchers these cash-like instruments can be purchased using benefit funds from transit benefit providers in various dollar denominations and distributed to employees who use them to pay for tickets, passes and to fund Clipper card accounts. Debit Cards a new type of benefit product approved by the IRS is becoming popular to use in redeeming transit benefits. These bankcards can be used at any location that accepts credit or debit cards and only sells transit tickets or passes (e.g., ticket vending machines, transit ticket outlets, online, etc.) or to fund Clipper card accounts. 6 Employees not eligible under section 132(f) may be eligible under other tax benefit sections. For example, these employees may be eligible under section 132(e) De Minimis benefits that allows for a tax exclusion of up to $21 a month. See IRS Publication 15-B for details and Treasury Regulations 1.132(9)(b) (Q/A-24) Consult your tax advisor for further information. 5

7 Cash Reimbursement the only method that requires recordkeeping and substantiation. Cash reimbursement can be used for transit or other eligible expenses like commuter parking where the employee has already incurred the expense and the reimbursement occurs through a bona fide reimbursement arrangement with the use of receipts. This method is prohibited in areas where transit passes are readily available. Consult your tax advisor for further information. Bicycle Benefit Bicycling to work is growing in popularity because of the positive impact on the environment, and the health and wellbeing of individuals. Employers may offer a tax- free benefit to employees who bicycle to work as part of a comprehensive Commuter Choice Tax Benefit Program. Here are the conditions for bicycle commuters: Must regularly bike to work during the month Limited to up to $20 a month Paid for by employer, pretax option is not allowed Provide through a reimbursement arrangement For equipment, storage and maintenance expenses Cannot receive transit, vanpool or commuter parking benefits during the month in which bicycle benefit is received 6

8 A Benefit That Benefits Everyone Why do thousands of employers here and around the country offer this benefit? It s simple, the Commuter Choice Tax Benefit Program is designed to encourage and support the use of commuting modes that reduce congestion and help improve air quality. It s a voluntary benefit, which provides employees with much needed help in paying for one of their largest household expenses. Additionally, it helps employers attract and retain employees at substantial cost savings. Does It Work? Yes! Studies have shown that employees who are offered the benefit do see a change in their employees commuting habits and their perception of their employers. One study has shown that 18 percent of employees who use the transit benefit shifted from driving alone. 7 Other studies have shown that it improves morale and employees positive feelings about their employer. Many employees who are aware of the benefit look for employers who offer this benefit while job hunting percent of employees who use the transit benefit shifted from driving alone to work. Setting up a Commuter Choice Tax Benefit Program is not difficult, requiring a few key decisions by the employer. First, ask yourself: 1. What type of tax benefit do you want to offer? Employee paid (pretax), employer paid (subsidy) or some amount of employer assistance. 2. What amount, if any, will you contribute and what monthly benefit limit will you allow? Determine if you will offer the federal monthly benefit limit or a lesser amount. 3. Which benefits will your program include? Most employers find advantages to offering both the transit and vanpool benefits. 4. Will you administer the program yourself or hire a third party administrator? 7 The Impact of Commuting on Employees, Businessweek Research Services and TransitCenter, Ibid. and 2008 Commuter Impact Survey, TransitCenter, Inc

9 Administration Administration is the most important decision you will need to make as it will impact your involvement in implementing a program and determining the costs associated with offering the program. Here is a general guide: Small and Medium Size Employers Generally speaking, small and medium size employers can administer their programs themselves, as follows: Clipper Direct program - allows employers to register their employees Clipper cards to fund the Clipper card accounts with tax-free funds. These funds can be used on participating transit services such as buses, trains, subways, ferries, and light rail. Always check to make sure your transit provider participates. Benefit Products - Several transit benefit providers specialize in providing benefit products to employers in bulk so they can be distributed by companies to their employees. 9 These products include vouchers and transit debit cards. Large and Medium Size Employers Most large employers select a third party administrator (TPA) to handle their program, particularly if they have multiple worksite locations. Some medium size employers do as well for the convenience. TPAs offer the following services: 1. Online services handling: a. Eligibility testing b. Enrollments c. Account management 2. Benefit product distribution and funding employee accounts with transit operators 3. Customer service 4. Reporting and compliance issues 5. Marketing 9 See list of benefit providers at the end of this document. 8

10 In Selecting a TPA Employers Should Find Out the Following: 1. Does the provider handle all the locations where your facilities are located? 2. Are the fees charged competitive? 3. Does the provider offer all benefits? 4. What are the startup costs, and how long does it take to set up a program? 5. Does the provider use benefit products that are convenient, easy to use, and compliant with IRS requirements? 6. What reports and information are available? 7. Will the provider market the program to your employees? 9

11 Further Assistance The San Francisco Bay Area offers employers many options for assistance and services to implement a Commuter Choice Tax Benefit Program. For more information see the lists below: Benefit Providers The following provide support with the administration of Commuter Tax Benefits. Use this key to identify unique offerings of each: 1. Provides benefits administration 2. Distributes transit passes 3. Distributes vouchers 4. Provides debit cards Clipper Direct (1, 2) custserv@clippercard.com directbene_ts.clippercard.com PayFlex Systems USA (1, 2, 3, 4) pay_ex.com TranBen (3) support@tranben.com tranben.com WageWorks (1, 2, 3, 4) wageworks.com Benefit Resource (1, 4) Thomas Guiler Vice-President EXT: 112 sales@benefitresource.com benefitresource.com Commuter Check/ Commuter Check Direct (1, 3, 4) sales@edenusa.com commutercheck.com commutercheckdirect.com EBS Employee Benefits Specialists (1, 2, 3, 4) commutercheck.com commutercheckdirect.com Trust Administrators, Inc. (1, 4) Royce A. Charney 1300 Clay Street, Suite 600 Oakland, CA info@trustadmin.com trustadmin.com Information Providers The following groups provide information on Commuter Choice Tax Benefit Programs: 511 Call 511 (say Rideshare) commuterbenefits@511.org 511.org Sacramento Region or sacregion511.org Peninsula Traffic Congestion Relief Alliance commute.org 511 Call 511 (say Rideshare) 511.org San Benito Rideshare POOL (7665) sanbenitorideshare.org Commute Alternatives- A program of Association of Monterey Bay Area Governments POOL (7665) commutealternatives.info San Francisco Dept. of the Environment Sue-Ellen Atkinson sue-ellen.atkinson@sfgov.org sfgov.org Santa Cruz Commute Solutions POOL (7665) commutesolutions.org Solano Napa Commuter Information commuterinfo.net Commute Connection San Joaquin Council of Governments commuteconnection.com 10