Commuter benefits permit employees to use tax-free dollars to cover public transportation and parking costs for travel to and from work. These benefits help boost take-home pay for employees, reduce payroll costs for employers, and encourage greater use of mass transit.
These benefits for traveling to work have been on a lot of people’s minds during extended work-from-home restrictions brought on by the coronavirus pandemic. So, what happens to unused commuter benefits? It depends on your situation.
You may have options if you have funds in your account at the end of each month or leave your job.
What Are Commuter Benefits?
There are usually two types of commuter benefits:
- Pre-tax employee payroll deductions: Employees can elect to use pre-tax dollars each month to cover expenses incurred for travel to and from work.
- Tax-free employer-paid subsidies: Employers can offer tax-free commuter benefits to employees in the form of a supplemental benefit.
Employers can choose to offer deductions, subsidies, or a combination of both. Some cities and states require companies of a specific size to provide these benefits. Geographic areas that are subject to such mandates include:
- Berkeley, California: Companies with 10 or more employees working at least 10 hours per week
- San Francisco: Companies with 20 or more full-time employees working at least 10 hours per week
- New York City: Companies with 20 or more full-time, non-union employees working an average of 30 hours per week
- Seattle: Companies with 20 or more employees working at least 10 hours per week
- Washington, D.C.: Companies with 20 or more employees doing at least 50% of their work in the District
Eligible expenses may include passes for travel on buses, trains, trolleys, ferries, water taxis, subways, and cover parking fees. You may also be able to use commuter benefits to pay for vouchers, tokens, ridesharing, and vanpooling costs.
Whether these benefits are extended in addition to the employee’s salary or as a pre-tax employee deduction, the employer can incur payroll tax savings. However, the Tax Cuts and Jobs Act disallowed individual tax deductions for expenses associated with transportation fringe benefits and some other commuting expenses.
Employers who offer subsidies are not responsible for payroll taxes on the funds contributed because they are classified as tax-free transportation fringe benefits. With pre-tax contributions, employees are exempt from federal income taxation on them, and employers save around 7.5% in payroll taxes on the amount that is contributed, according to Bay Area Rapid Transit (BART). Transit benefits are also a more valuable alternative for employees than an equivalent pay raise because of the tax advantage.
What if You Have Unused Funds?
The federal tax code permits the exclusion of qualified commuter transit and parking expenses of up to $270 per month for each, for a total of $540, per IRS Publication 15-B. These amounts apply to tax years 2020 and 2021. If your monthly expenses are less than $270 for transit or parking expenses for the month, the unused portion will roll over to the following month. This pattern will continue until you leave your job.
Many transportation agencies gave refunds during the first few months of the COVID-19 pandemic for unused passes, although such refunds usually wouldn’t be available.
If you have a transit pass that was purchased through your commuter benefits program and it does not expire, you may be able to use it in the future. If you have a pass that does expire and you do not plan to use it this month, contact your transportation benefits service. You can ask whether you can get an account credit or a refund that can be used in the future when you do commute again.
What Happens When You Leave Your Job?
If you are terminated or resign from your job, you will no longer have access to your commuter benefits account. You may have up to 90 days from your final date of employment to request reimbursement for eligible out-of-pocket commuting expenses incurred during your time with the employer within the claim year.
The federal tax code prohibits employers from refunding unused commuter benefits when employment is terminated. So, unused pre-tax benefits are frozen when you leave and what remains in the transit or parking account at the end of the 90 days will be relinquished to your employer.
Employees who plan to leave their job soon can curb their losses from this provision by scaling back or stopping contributions in advance of departing. This allows them to use up the funds that remain in their account or to reduce the balance that will be left behind.
- Commuter benefits help employees save on transportation costs and increase their take-home pay.
- Any unused portion of your funds for transit or parking will roll over each month and build up, but you can spend no more than the maximum monthly amount allowed for each account by the IRS, currently $270 for tax years 2020 and 2021.
- If you leave your job, you will lose access to your commuter benefits account and may have up to 90 days to request reimbursement for eligible transit expenses incurred while you were employed.
- Pre-tax contributions that remain in your account at the end of the 90-day reimbursement window are forfeited and returned to the employer.