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Commonly Asked Questions About Commuter Choice
What is the "Commuter Choice Program?"
It is a provision of the Internal Revenue Code [(26 USC 132(f)] that permits an employer to pay for an employee’s cost of commuting to work, in other than a single occupancy vehicle.
Why is there a Commuter Choice Program?
The program is designed to improve air quality, reduce traffic congestion, and conserve energy by encouraging employees to commute by means other than single occupancy motor vehicles.
How does the program operate?
Under Section 132 of the Internal Revenue Code (IRC), an employer may provide up to $65 per month to those employees who commute to work by transit or vanpool. The employer can deduct these costs as business expenses and the employees do not report the subsidy as income for tax purposes. The subsidy is considered a "qualified transportation fringe" benefit.
What constitutes the "benefit"?
An employer may provide cash reimbursement to an employee for public transit or vanpool transportation costs for trips taken between his/her home and place of employment. Such reimbursement is only permitted if a voucher or similar item which may be exchanged only for a transit or vanpool pass is not readily available. Cash reimbursement does not include cash advances. A transit pass includes any pass, token, farecard, voucher, or similar item entitling a person to transportation on mass transit facilities or provided by a vanpool.
Can an employee receive the benefit instead of salary?
Yes. There are several ways in which an employee may receive a transit or vanpool benefit. First, an employer may elect to provide the benefit in addition to an employee’s current salary. The benefit would be free of all payroll and income taxes to the employee, and the employer would deduct the cost from their business income taxes. Second, an employer may permit employees to set aside (in lieu of) some of their pre-tax income to pay for transit or vanpools. Employees would not pay income or payroll taxes on the amount of the benefit they "purchase" and employers would not pay payroll taxes since the amount is treated as a benefit rather than as taxable salary. The employee’s W-2 would reflect a reduction equal to the amount of the benefit selected, up to $65 per month. Third, an employer may share the cost of commuting with their employees. Employers may give their employees part of the commuting expense tax free in addition to their compensation and allow the employees to set aside part of their gross income to pay the remaining amount, up to the total monthly limit of $65.
If an employee receives a parking benefit, can he/she convert it into a transit or vanpool benefit?
Yes. Employers may establish a parking cash out program whereby employees may chose to cash out the value of employer-provided parking, forego parking, and receive the taxable cash value of the parking, or receive a tax-free transit or eligible vanpool benefit up to $65 per month. The employer transfers its expenditure for the parking space, assuming it is leased, to a direct payment to the employee. If the employee accepts the cash value rather than a tax-free transit or vanpool benefit, then the employee also incurs payroll and income taxes on the amount which is treated as salary. If the cash out value is greater than $65, then the employee could accept a tax-free transit or vanpool benefit and receive the balance in taxable salary. The employer only incurs payroll taxes on the cash value provided. This additional compensation will allow the employee to finance other commuting modes that are not considered qualified transportation fringe benefits, such as walking, bicycling, carpooling, roller blading, or other means of commuting to work.
What vanpools qualify for this benefit?
A vanpool, or "commuter highway vehicle" must have a seating capacity of at least 6 adults (not including the driver) and at least 80% of the mileage use must be for purposes of transporting employees in connection with travel between their homes and places of employment. For these commuting trips, the number of employees transported must be at least one-half of the adult seating capacity of the vehicle, excluding the driver.
Can I receive both a transit and vanpool benefit?
Yes. However, only one $65 limit applies per month whether these benefits are provided separately or in combination with one another.
Can the $65 limit increase over time?
Yes. An indexing mechanism in the IRC permits the limit to increase by $5 increments based on changes to the cost of living index. Recently enacted legislation provides for the limit to increase from $65 to $100 for taxable years beginning after December 31, 2001.
Is there a separate program for Federal employees?
Yes. Public Law 103-172, the Federal Employees Clean Air Incentives Act, was signed into law by President Clinton on December 2, 1993. The Act allows heads of Federal agencies to provide transit passes to employees, tax free. It makes permanent Federal participation in a program that has existed for the private sector under Section 132 of the IRC of 1986, whereby employers could provide employees with transit benefits that were both tax deductible to employers and tax exempt to employees. The Energy Policy Act of 1992 established the maximum monthly tax free benefits of $60 (now $65) for transit and vanpools. Agencies may also furnish space, facilities, or services to bicyclists in their commute to work.
Can Federal employees receive the transit or vanpool benefit instead of salary?
Yes. The Office of Personnel Management in its decision letter S001842 dated August 11, 1998 determined that agencies may use appropriated funds to establish and operate programs that allow employees to elect to receive qualified transportation fringes in lieu of salary. An employee’s decision to receive the transportation fringe benefit will not affect the employee’s basic rate of pay, which is the rate of pay fixed by law or by administrative action (5 C.F.R. 550.103). Thus, to give some examples, an employee’s rate of pay for purposes of overtime, lump-sum annual leave, and calculating an employee’s retirement annuity would be based on the employee’s rate of basic pay without regard to whether the employee elected to receive transportation fringe benefits.
Where can I obtain further information?
See also [Explanation of Commuter Choice Options •Glossary of Commuter Choice Terms •Voucher and Pass Program Directory •Dear Colleague Letter re: TEA-21 Changes to Transit and Vanpool Benefits] for further guidance. Check with your employer's human resources office to see if your employer is already providing a transit or vanpool benefit. If not, then contact your local transit agency to determine if they have a program to sell transit passes to employers for distribution to employees. Access to the home pages of more than 100 transit agencies can be found at this Web site under "Other Resources." You may also find the name of your transit agency at the American Public Transit Association website (http://www.apta.com/).
If you have any questions regarding the Commuter Choice Program, please contact:
William B. Menczer, Team Leader
Office of Policy Development, TBP-10
Federal Transit Administration
400 Seventh Street, SW, Room 9310
Washington, DC 20590
Tel: (202)-366-1698
Fax: (202) 366-7116
E-mail: william.menczer@dot.gov
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