Commuter Benefits Overview: Part I

Question: What are the tax-advantaged commuter benefits that employers can offer to employees?

Short Answer: Employers can provide tax-advantaged mass transit, vanpool, and qualified parking benefits to employees. The monthly limit for mass transit and vanpooling is aggregated, but the monthly limit for qualified parking is separate. Employees can therefore take advantage of the full limit for both transit pass/vanpooling and qualified parking.

Starting Point: Three Forms of Qualified Transportation Fringe Commuter Benefits
Employers can provide three types of tax-advantaged commuter benefits to employees under Internal Revenue Code §132(f):

1. Transit Passes (Mass Transit)

2. Commuter Highway Vehicles (Vanpooling)

3. Qualified Parking

For more details: Newfront Fringe Benefits for Employers Guide

Commuter Benefit #1: Transit Passes (Mass Transit)
2025 Limit: $325/month (combined with vanpooling)
“Transit passes” are defined as any pass, token, farecard, voucher, or similar item (including an item exchangeable for fare media) that entitles a person to transportation on mass transit facilities. Common examples include bus, train, subway, ferry, and light rail.

Commuter Benefit #2: Commuter Highway Vehicles (Vanpooling)
2025 Limit: $325/month (combined with transit passes)
Vanpooling is transportation in a “commuter highway vehicle” in connection with travel between the employee’s residence and place of employment.

A “commuter highway vehicle” generally must meet two requirements:

1. Capacity: The vehicle must have a seating capacity of at least six adults (excluding the driver); and

2. The 80/50 Rule: At least 80% of the vehicle’s mileage is reasonably expected to be for commuting employees on trips during which and at least 50% of the adult seating capacity (excluding the driver) is filled with such commuting employees.
   
   Note: The 80/50 rule does not apply to private or public transit-operated vanpools (i.e., vanpools that are not employer or employee-operated). Therefore, where available, ride-sharing services can qualify for vanpooling based only on the vehicle meeting the capacity requirement of having seating for at least six adults, not including the driver.

For more details: Ridesharing Options for Vanpool Commuter Benefits

Commuter Benefit #3: Qualified Parking
2025 Limit: $325/month
“Qualified parking” is defined as parking in either of two locations:

1. Business Location: Parking on or near the employer’s business premises; or

2. Transit Location: Parking at a location from which the employee commutes to work.

The business location option does not include expenses for parking at home. Parking on or near property used by the employee for residential purposes is not a qualified parking expense—even where an employee works from home and has home parking expenses (e.g., at an apartment or condo building).

The transit location option includes parking at a place from which to commute by mass transit, carpool, commuter highway vehicle, or any other form of paid transportation services.

• Note: Qualified parking does not include parking at a temporary work location, which is defined as a location that is realistically expected to last (and does in fact last) for one year or less. For example, employees cannot use the parking benefit to park at a one-time or short-term meeting, assignment, or project location.

Mass Transit/Vanpool Limit Not Combined with Qualified Parking Limit
The mass transit/vanpool monthly tax-advantaged limit is not combined with the qualified parking monthly tax-advantaged limit. Accordingly, employees can take advantage of up to the maximum of both the mass transit/vanpool benefit and the qualified parking benefit each month.

Example 1:

• Robert Paulson is an automobile recall specialist working in downtown Los Angeles.

• He drives to the local metro rail station and rides the light rail to the office daily.

• Both of Robert’s parking and transit pass commuting expenses exceed $325/month.

Result 1:

• Robert can contribute up to $325/month (2025) pre-tax to his qualified parking benefit to pay for parking at the metro rail station to commute to work.

• He can also contribute up to $325/month (2025) pre-tax to his mass transit benefit to pay for the light rail commute to work.

• Robert’s combined pre-tax commuter benefit of $650/month ($325/month qualified parking, $325/month mass transit) does not exceed any applicable limit.

Combined Employer/Employee Monthly Contribution Limit
Section 132(f) provides a tax-advantaged limit of $325 per month (2025) that may be contributed to a transit pass/vanpooling and/or qualified parking commuter benefit program. These limits are adjusted annually for inflation.

Both employer and employee contributions count toward the $325 monthly limit (2025). Accordingly, the availability of employee pre-tax contributions for each benefit is reduced by the amount of any tax-free employer contributions.

Example 2:

• Judy Bernly works 9 to 5 at Consolidated Companies in downtown San Francisco.

• She drives to the local BART (subway) station and takes BART to work.

• Consolidated Companies provides a mass transit/vanpooling and qualified parking subsidy of $100/month to employees’ commuter benefit accounts.

Result 2:

• Judy can contribute up to $225/month (2025) pre-tax to her qualified parking benefit to pay for parking at the BART station to commute to work ($225 employee + $100 employer).

• She can also contribute up to $225/month (2025) pre-tax to her mass transit benefit to pay for the BART commute to work ($225 employee + $100 employer).

• If Consolidated Companies permits it, Judy could also contribute amounts in excess $225/month on an after-tax basis to the commuter benefit program.

Taxable Commuter Benefits Permitted for Amounts in Excess of Monthly Limit

Where employee pre-tax contributions and/or employer tax-free commuter contributions reach the $325/month limit (2025), amounts in excess of the limit are permitted if included in the employee’s taxable income. Many commuter benefit TPAs offer employee after-tax contributions for excess amounts.

While there is no tax advantage to these excess contributions, some employees still consider after-tax contributions as a meaningful addition to ensure their commuter expenses can all be covered from the same account. There is no limit on after-tax amounts.

Example 3:

• Peter Gibbons spends $400/month taking the bus to his job as a computer programmer at Initech Coproration.

• Initech Corporation offers a mass transit commuter benefit program that allows employees to contribute up to the $325/month limit (2025) on a pre-tax basis, and any excess amounts on an after-tax basis.

Result 3:

• Peter can contribute $325/month on a pre-tax basis and $75/month on an after-tax basis to cover his full $400/month monthly bus fare through the commuter benefit program.

• Peter’s after-tax balance is not subject to the same restrictions as the pre-tax balance, which permits the employer to directly reimburse and cash-out after-tax contributions if desired.

Substantiation of Use of Commuter Benefits for Employee’s Commute to Work
Mass Transit: No Substantiation Required
There are no §132(f) substantiation requirements to confirm that employees are using the mass transit benefit exclusively to commute to work. The IRS has confirmed that employers are not required to verify that employees use the transit funds for commuting. Accordingly, there is nothing to prevent employees from also utilizing the mass transit benefit for purposes that are not work-related, such as to attend sporting events, visit family, go shopping, etc.

Furthermore, there is no requirement to substantiate the transit benefit is being used exclusively by the employee. Employers therefore have no obligation to prevent employees from providing access to the commuter debit card or transit passes to family members for their commuting (or other) purposes.

The IRS has also confirmed that employers can choose to require that employees certify the use of the transit benefit for their own commuting purposes. Employers that make employer contributions to the benefit might consider requesting the TPA enforce this requirement to prevent abuse of the benefit. Otherwise, employers generally would have no incentive to limit employees’ use of the benefit.

Qualified Parking: Substantiation Required
Unlike transit passes, qualified parking benefits may be used only by employees in connection with their commute to their places of employment, in order to park on or near the employer’s business premises or at location from which the employee commutes to work. Accordingly, the §132(f) rules require that the program establish bona fide substantiation arrangements to verify that employees have incurred the parking costs themselves in connection with their travel between home and work.

Employees must substantiate any parking expenses reimbursement request “within a reasonable period of time.” The regulations establish an outer limit of 180 days from the date the parking expense was paid as always satisfying this reasonable period of time standard.

State and Local Employer Commuter Benefit Requirements
A number of state and local governments have imposed requirements that employers offer commuter benefit programs to employees. Although these programs vary in multiple ways, employers can typically satisfy these requirements by offering employees the ability to contribute pre-tax up to the monthly maximum ($325 in 2025) to a mass transit/vanpool and qualified parking commuter benefit arrangement.

In recognition of the recent mainstream adoption of work-from-home arrangements, the Bay Area Commuter Benefits Program has even added the option to allow employees to “telework” as a qualifying option to satisfy the employer commuter benefit mandate.

For more details:

• Newfront Fringe Benefits for Employers Guide

• Bay Area Commuter Benefits Program Telework Option

• The Bay Area Commuter Benefit Program Overview

Stay tuned for Commuter Benefits Overview: Part II addressing the other qualified transportation rules!

Relevant Cites:

IRC §132(f):
(f) Qualified transportation fringe.
(1) In general.
For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:
(A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee's residence and place of employment.
(B) Any transit pass.
(C) Qualified parking.

Treas. Reg. §1.132-9
Q. 4. What is qualified parking?
A. 4. (a) Qualified parking is parking provided to an employee by an employer—
(1) On or near the employer's business premises; or
(2) At a location from which the employee commutes to work (including commuting by carpool, commuter highway vehicle, mass transit facilities, or transportation provided by any person in the business of transporting persons for compensation or hire).
…
(c) However, parking on or near property used by the employee for residential purposes is not qualified parking.
…
Q. 16. How does section 132(f) apply to expense reimbursements?
…
(c) Substantiation requirements…The expense must be substantiated within a reasonable period of time. An expense substantiated to the payor within 180 days after it has been paid will be treated as having been substantiated within a reasonable period of time.
…
Q. 18. What are the substantiation requirements if an employer distributes transit passes?
A. 18. There are no substantiation requirements if the employer distributes transit passes. Thus, an employer may distribute a transit pass for each month with a value not more than the statutory monthly limit without requiring any certification from the employee regarding the use of the transit pass.
Q. 19. May an employer choose to impose substantiation requirements in addition to those described in this regulation?
A- 19. Yes.

IRS Chief Counsel Advice 200105007:
Under the ruling, a temporary work location is a work location that is realistically expected to last (and does in fact last) for 1 year or less in the absence of facts and circumstances indicating otherwise.
…
We believe the section 132(a)(5) exclusion for qualified parking is intended to provide a tax-free benefit for commuter parking. In other words, this section is generally intended to provide a benefit for parking costs that are not deductible under section 162(a). Under Rev. Rul. 99-7, parking costs incurred at a temporary work location are generally deductible under section 162(a); whereas costs for parking at any nontemporary work location are considered personal and are therefore nondeductible. Thus, we have concluded that reimbursement for parking at any nontemporary work location under the standards in Rev. Rul. 99-7 falls within the meaning of “parking provided to an employee on or near the business premises of the employer” under section 132(f)(5)(C).

IRS Information Letter 2010-0146:
Transit Passes: The Regulations state that an employer may provide transit passes only to those individuals who are “currently employees of the employer at the time the qualified transportation fringe is provided.” Section 1.132-9, Q&A 18 of the Regulations states that there are no substantiation requirements if the employer distributes transit passes. The Regulations do not, however, prohibit employers from independently requiring employees to certify, for example, that they used such transit passes only in connection with their own commutes from their residences to their workplaces [Regulations § 1.132-9, Q&A 19].

Parking Benefits: Like transit passes, the Regulations state that an employer may provide qualified parking only to those individuals who are “currently employees of the employer at the time the qualified transportation fringe is provided.” Unlike transit passes, though, these parking benefits may be used only by the employees themselves, and only in connection with their commutes to their places of employment. Section 1.132-9, Q&A 4 of the Regulations limits the exclusion to parking provided to an employee by an employer “[o]n or near the employer’s business premises,” or “[a]t a location from which the employee commutes to work.” The Regulations also require employers who provide parking benefits to establish bona fide substantiation arrangements, under which employers verify that the employees have incurred the costs themselves in connection with their travel between home and work [Regulations section 1.132-9, Q&A 16(c)].

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).