Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century (TEA-21) allows employers to offer employees the opportunity to set aside a portion of their salary to pay for certain transportation expenses. The employee will not be taxed on amounts set aside and used for qualified expenses (that is, pre-tax dollars are used to pay the commuting expenses).
Under IRS Section 132 and TEA-21 qualified transportation expenses generally include payments for the use of mass transportation (for example, train, subway, bus fares), and for parking (see further details below).
How the Plan Works:
The transportation fringe benefit is similar to the pre-tax flexible spending accounts available for medical expenses and dependent care. One important difference, however, is the transportation benefit does not include a "use it or lose it penalty," as is the case with medical/dependent care flexible spending accounts.
Before the start of the Section 132 plan year, individual employees elected to set aside a certain amount of pre-tax salary to cover qualified costs incurred in commuting to work. The employee will designate an amount (up to $125.00 per month in 2012) for mass transit expenses and a separate amount (up to $240.00 per month in 2012) for parking expenses -- separate reimbursement accounts are maintained for each category, and funds cannot be commingled or transferred between accounts (for example, amounts cannot be transferred from the mass transit to the parking account).
As the employee incurs Section 132 expenses during the year, a request form may be submitted to the employer for reimbursement. If the employee does not use the full amount before the end of the program year, the left over amount is carried forward to the next year.
Who is Eligible Under Section 132:
As a general rule, the transportation fringe benefit can only be provided by employers to employees. Common law employees and officers of corporations are eligible (the law does not include non-discrimination requirements for the benefit). Sole proprietors, partners, independent contractors, and two-percent shareholders of S corporations are not eligible for this transportation fringe benefit.
Qualified Section 132 Expenses: Parking expenses that can be paid with pre-tax dollars include the costs of (1) parking a vehicle in a facility that is near the employee's place of work, or (2) parking at a location from where the employee commutes to work (for example, the cost of parking in a lot at the train station so that the employee can continue his/her commute on the train).
Qualified Mass Transit Expenses Include:
Transit passes for mass transportation to and from work. Qualified amounts include costs of any pass, token, fare card, voucher, or other item that entitles the employee to use mass transit for the purpose of traveling to or from his/her place of work. However, when a transit voucher program is readily available, Federal regulations prohibit the use of cash reimbursement as a way to provide transit benefits. Section 132(f) (3) states: Transit Benefits can include cash reimbursement to an employee as long as the reimbursement is for any transit pass, and a voucher or similar instrument which can be used to purchase the transit pass is not readily available for direct distribution to the employee. The mass transit can be a public system, or a private enterprise provided by a company/individual who is in the business of transporting people in a "commuter highway vehicle." Such a vehicle must have a seating capacity for six or more adults (not including the driver), and at least 80% of the of the vehicles' mileage must be from transporting employees to and from their place of work. Additionally, the vehicle must be carrying at least three passengers (not including the driver). Commuter highway vehicles may be owned or leased by an employer to be used by employees or a third-party provider for transportation purposes. Employees can also own and operate commuter highway vehicles.
Federal income tax and social security (FICA) tax are not imposed on amounts set aside for IRS Section 132 qualified transportation expenses. Depending on state law, individuals may also avoid state and local income taxes on earnings set aside. The federal tax savings can be as much as 35.65% (28% federal tax plus 7.65% FICA).
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