The term “transportation benefit” is thrown around a lot in discussions of employee benefits and compensation but people often don’t fully understand what the transportation benefit is or how it can help them. Confusion about transportation benefits is completely understandable too – who wants to slog through dense IRS documents to learn the ins and outs of the transportation benefit? The topic is further complicated by the various names that are used interchangeably: transportation benefit, transit benefit, commuter benefit, or my personal favorite, the Qualified Transportation Fringe Benefit.
Most people are more concerned about simply getting to work on time each day and haven’t really given much thought to the impact their commuting choices can have on their end-of-year tax situation or their take-home pay. Don’t get me wrong, there are many reasons to consider commuting via transit, vanpool, or biking and walking that go beyond simply running the numbers (reduced stress, increased productivity, job satisfaction, environmental consciousness, etc) but let’s stick to the dollars and cents for this look at the transportation benefit.
There are two types of transit benefits: subsidized and pre-tax. Regardless of which type you are looking to roll out at your company the IRS limits the monthly transit benefit amount to $260 per employee.
What's a Subsidized Benefit?
A subsidized benefit is a huge boost for an employee’s overall compensation package. A company subsidizes the cost of an employee’s transit (or vanpool) commute by depositing money on that person’s SmarTrip card through their payroll company or the free regional SmartBenefits program.
Let’s say an employee has a subsidized transit benefit and needs the full $260 every month for her commute (most people do not need this much however). That $260/month would equate to an additional $3,120 a year in overall compensation but it would only cost the employer $1,724 to extend that benefit since they use pre-tax dollars to do so.
That’s a lot of bang for your buck!
Basically, the company doesn’t owe payroll taxes on that $3k+ employee benefit. This can be a key factor in attracting and retaining valuable employees.
What's a Pre-Tax Benefit?
The other version of the transit benefit is the pre-tax option. The pre-tax transit benefit allows employees to set aside a predetermined amount of their salaries each month to be deposited on their SmarTrip cards for riding Metro, buses, MARC, VRE, or vanpools throughout the region.
While not a lucrative a benefit for employees, the pre-tax option still allows employees to save a lot on their annual taxes by allowing them to use pre-tax dollars for their commutes. An employee using the full $260/month pre-tax transit benefit will save $1,185 by the end of the year!
Employers also save money through the pre-tax transit benefit – saving upwards of $400 per employee if that employee is using the full benefit amount. The pre-tax transit benefit is a win-win for everyone involved and should be considered part of a basic benefits and compensation package at any company in the Metro DC area.
What About Free Parking?
It is even more important to offer some form of transit benefit if your company is paying for employee parking in any way – not all employees want to or are able to commute with a car so why should they be penalized for commuting in a more sustainable way? Do the right thing and provide an equal benefit for transit if your company pays for parking.
Interested in learning more or does all this transit benefit jargon has you going like this? Drop ATP a line and we’ll be more than happy to help you navigate the riveting world of qualified transportation fringe benefits.
It may not be the most exciting topic, but it’s certainly an important one that can really benefit your colleagues and company.