Pre-tax parking and transportation benefits.

• Author: Lopez, Jennifer

Legislation enacted last year has expanded significantly the transportation benefits an employer can offer its employees on a tax-free basis.

Background

Sec. 132(f) defines a "qualified transportation fringe" as any of the following provided by an employer to an employee: (1) transportation in a commuter highway vehicle; (2) transit passes; and (3) qualified parking. A "commuter highway vehicle" is defined as any vehicle seating at least six adult passengers, when 80% of the mileage is for travel between the employees' residence and place of employment and at least half of the vehicle's adult seating capacity is used for employees on such trips. The term "transit pass" means any pass, token, farecard, voucher or similar item that entitles an employee to transportation on mass transit or in a vanpooling vehicle. "Qualified parking" is defined as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes by commuter highway vehicle, transit pass or carpool.

Prior to 1998, these transportation benefits were excludible only if an employee received the benefit in addition to (rather than in lieu of) regular compensation. If an employer offered its employees a choice between parking and cash compensation, the amount was taxable to the employees regardless of their choices.

The Taxpayer Relief Act of 1997 (TRA '97) amended Sec. 132(f), effective Jan. 1, 1998, to allow an employer to give its employees a choice between receiving taxable cash or tax-free parking benefits. The exclusion is not lost merely because an option for cash is offered; only when an employee chooses cash is the employee required to include that amount in income. This option was not available for transit passes and vanpool benefits under the TKA '97; these benefits continued to be exdudible only if provided in addition to (and not in lieu of) any compensation otherwise payable to an employee.

Impact of 1998 Legislation

In 1998, the Transportation Equity Act for the 21st Century further modified Sec. 132(f) to give transit and vanpooling benefits the same tax treatment as that afforded parking benefits in the TRA '97. Thus, the options an employer can offer its employees as an alternative to cash were expanded to include employer-provided transit passes and vanpooling as well. Accordingly, effective Jan. 1, 1998, no amount is includible in an employee's income or wages merely because the employee is...