Tax-free commuter benefits, also known as qualified transportation fringes, are employer provided voluntary benefit programs that allow employees to reduce their monthly commuting expenses for transit, vanpooling and work-related parking costs. A new bicycle benefit was added effective January 1, 2009 which is detailed below. The benefit is a federal tax benefit authorized under the Internal Revenue Code Section 132(a), Qualified Transportation Fringes. Monies used for these eligible expenses are excludable from gross income subject to federal taxes. Many states also exclude these monies from state and local taxes.

Established in 1993 as part of the federal tax code section 132(f),[4] commuter benefits were meant to provide tax incentives to employees to encourage their use of mass transportation in order to reduce congestion and improve air quality. The law provides for monthly maximum 'caps' on the amounts that can be excluded from gross income and are therefore not taxed as ordinary income.

Eligible expenses for transit include expenses associated with using any public or privately operated transit service. Allowable ways to provide for transit expenses is through the use of transit passes which includes fare cards, tokens, vouchers or passes which entitle a person to the use of a transit service or to purchase a transit pass. Cash reimbursement can also be used in certain circumstances where a voucher or similar instrument is not "readily available" as defined by statute. However, cash reimbursement must be supported by a "bona fide reimbursement system" which includes either receipts or a certification for the type of expense.

Vanpooling is an eligible expense as long as the vanpool meets certain requirements, including that 80% of the mileage must be for the transport of employees to and from the place of work, and that the seating capacity must be for six employees plus the driver and at least half of the seats are used. Vanpools can be operated either directly or indirectly by the employer or arranged by the employee for the purpose of commuting.

Commuter parking is defined as parking at or near the workplace or at a location from which an employee commutes to work by transit, vanpool or carpool. This is the only carpool related benefit in the statute. In addition, parking which is for residential purposes is excluded.

Under current U.S. law, commuter benefits are only available through an employer. An employee cannot directly take advantage of these tax benefits by, for example, taking a tax deduction or credit on that person's individual tax return. Depending on the level of employer commitment and/or desired level of financial contribution, options for commuter benefits may include:

  • An employer financed tax-free fringe benefit by which a company pays directly for the cost of an employee's use of public transportation or parking (up to the designated tax-free maximum), and the value of such benefit is not added to the employee's gross income.
  • An employee financed commuter benefit in which an employee designates a portion of salary before taxes (pretax income) to pay for qualified transit, vanpooling, or parking expenses (up to the IRS allowable monthly maximum).
  • A combination of the previous two options in which a portion of the benefit is funded through a tax-free fringe, with the remainder funded with pretax income of the employee, provided the aggregate does not exceed the monthly statutory limits.

Qualified transportation fringe benefits allowed under section 132 (f) include reimbursement for the cost of transportation in commuter highway vehicles (vanpooling), transit passes, and qualified commuter parking expenses.[5] Benefits are commonly distributed in the form of prepaid transit tickets or metro passes (for use on subway, bus, light-rail, ferry, or jitneys), prepaid transit or parking vouchers, debit-cards or other electronic media (usable only for qualified commuter benefits), or cash reimbursements for transit or parking expenses. Commuter benefits are not governed under the same rules and regulations as Flexible spending account (FSA) arrangements and are treated differently for tax and reporting purposes.

Significant tax savings are available through commuter benefits programs for both employers and employees. If offered as a pretax benefit, employees save on their federal payroll taxes because the amount designated by the employee is deducted from their gross income, and employers save because they are not required to pay payroll taxes on such deducted amount. And for employees who are subject to state and local taxes that recognize pretax benefits, their savings can be even greater. Employers who provide the benefit as a tax-free fringe benefit (paid by the employer) save on payroll taxes because the employer does not need to include the amount of the fringe benefit in the employee's gross income. Normally, the amount of any fringe benefit provided to employees must be included in the employee's gross income, but qualified transportation fringe benefits provided under section 132(f) are excluded from this requirement.