Setrics Tracker
Health and Welfare

Newly Passed Tax Cuts and Jobs Act Eliminates Employers’ Commuter Benefits Deductions

On December 20, 2017, Congress passed the Tax Cuts and Jobs Act, and most political commenters expect President Trump to sign the bill into law before January 31, 2018. Under the Tax Cuts and Jobs Act, employers who offer qualified transportation fringe benefits (e.g., parking, transit, and vanpooling) will be unable to deduct amounts incurred or paid for such fringe benefits after December 31, 2017. This revision eliminates a major incentive for employers to offer transportation fringe benefits to their employees.  

Under the newly-passed tax reform bill, Section 274(a) of the Internal Revenue Code will include a new provision that expressly disallows deductions for “the expense of any qualified transportation fringe (as defined in section 132(f)) provided to the employee of the taxpayer.” Further, the newly-added Section 274(l) generally disallows deductions for any expense incurred for providing transportation, payment, or reimbursement to an employee relating to travel between the employee’s residence and workplace.  

Exceptions 

Two small exceptions to Section 274(l) exist for employers. First, expenses that are “necessary for ensuring the safety of the employee” between the employee’s residence and workplace will continue to be deductible. Unfortunately, the bill neither states what expenses qualify as necessary to ensure an employee’s safety nor outlines a qualification process. Since most employees do not require bullet-proof transportation for the daily commute, however, most employers are unlikely to utilize this exception. Consequently, employers should not expect clarification from the IRS regarding this exception any time soon.  

The second exception is an eight-year postponement from Section 274(l) for qualified bicycle commuting reimbursements. So, between December 31, 2017, and before January 1, 2026, employers will be able to deduct expenses or payments or reimbursements to employees “for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.” Under Section 132(f), the actual exclusion limit is $20 times the number of months an employee used a bicycle for a substantial portion of the commute between the employee’s residence and workplace and did not receive any other qualified transportation fringe benefit. Consequently, the maximum allowable deduction per employee is $240, provided employers do not offer any transit, parking, or vanpooling benefits.  Employers who operate in areas with state mandates to provide bicycle commuting benefits are the only employers likely to utilize this exception for the next eight years. 

What This Means for Employees 

Although the Tax and Jobs Act greatly reduced employers’ deductions of qualified transportation fringe benefits, employees will continue to receive parking, transit, and vanpooling benefits offered by employers on a tax-free basis. Section 132(f) of the Internal Revenue Code, which governs qualified transportation fringe benefits remains relatively unaffected by the Tax and Jobs Act; however, the bill does suspend qualified bicycle commuting reimbursement from the definition of qualified transportation fringe benefits until January 1, 2026. Thus, employees who receive payments or reimbursements for bicycle purchases, improvements, repair, or storage through their employers’ qualified transportation or cafeteria plan will now pay federal taxes on such payments and reimbursements for the next eight years. 

While employees will continue to receive parking, transit, and vanpooling benefits tax-free, the question remains whether employers will reduce or eliminate such benefits. While transportation fringe benefits remain a method to attract or retain employees, a major incentive (in the form of tax deduction) for employers to provide such benefits is now gone. Thus, employers who offer parking, transit, or vanpooling benefits will likely be reviewing the value of providing these benefits to employees. As a result, employees may be spending more post-tax dollars on parking and commuting to work in years to come.  

What This Means for Employers 

The information in this article will likely not surprise employers and individuals who closely followed the tax-reform bills and debate. At a minimum, employers who offer parking, transit, or vanpooling benefits should review the value of providing these benefits to employees with their trusted legal and tax advisors as well as employees. Employers will likely need to amend their cafeteria or qualified transportation plan documents as well as other informative documents to reflect changes in benefit offerings. NBS stands at the ready to assist employers with amending plan documents, creating summary plan descriptions, and administering cafeteria and fringe benefits. 

Subscribe to the NBS Knowledge Base

Subscribe to be notified when new articles are posted.