Employer Transportation Benefits in the United States
An employer may provide transportation benefits to their employees that are tax free up to a certain limit. Under the US Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

 section 132(a)
Internal Revenue Code Section 132(a)
Internal Revenue Code Section 132 provides eight types of fringe benefits that are excluded from gross income. These include fringe benefits which qualify as a no-additional-cost service, qualified employee discount, working condition fringe, de minimis fringe, qualified transportation...

, the qualified transportation benefits is one of the eight types of statutory employee benefit
Employee benefit
Employee benefits and benefits in kind are various non-wage compensations provided to employees in addition to their normal wages or salaries...

s (also known as fringe benefits) that are excluded from gross income
Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...

. The two types of qualified transportation benefits are (1) transit passes and van pooling and (2) parking. Bike commuters can also be reimbursed for certain expenses beginning in 2009.

While a commuter benefits program offers a convenient way for employees to lower their commuting costs by utilizing pretax dollars to pay for commuting costs, the program offers other benefits as well. The program offers an employer the ability to enhance their benefits package with an incentive that can be used to attract and retain qualified employees particularly in areas with transit access.


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 recently 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)
Internal Revenue Code Section 132(a)
Internal Revenue Code Section 132 provides eight types of fringe benefits that are excluded from gross income. These include fringe benefits which qualify as a no-additional-cost service, qualified employee discount, working condition fringe, de minimis fringe, qualified transportation...

, 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), commuter benefits were meant to provide tax incentives to employees to encourage their use of mass transportation
Public transport
Public transport is a shared passenger transportation service which is available for use by the general public, as distinct from modes such as taxicab, car pooling or hired buses which are not shared by strangers without private arrangement.Public transport modes include buses, trolleybuses, trams...

 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. In 2008, transit and vanpool expenses up to $115 and commuter parking costs up to $220 are excludable each month. An employee can receive both the transit/vanpool benefit and the commuter parking benefit for a maximum of $335 a month. However, the amounts allowed for parking cannot be used for transit or vice versa. Thus, if an employee receives as a tax-free benefit from an employer $220 to cover the cost of that employee’s parking, none of the amount can be used for transit. As of January 1, 2009, the maximum caps will increase to $120 per month for transit and $230 per month for parking. As of the passing of the economic stimulus package, the maximum cap will increase to $230 per month for transit.

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 farecards, 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 in which 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, vanpooling or carpools. 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 is 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. 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
Flexible spending account
A flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...

 (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.


Prior to 1984, the IRS treated free employee parking, provided by an employer, as a tax-free fringe benefit regardless of the value of the parking. There was no tax-free benefit for transit commuting. This parking subsidy served as an incentive, in some cases a significant incentive, to drive to work even in areas where there was a good transit alternative. Many believed that such subsidies contributed to the growing congestion on the highways. In one study conducted in the New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...

 metro area, as many as 64% of the solo drivers commuting into Manhattan
Manhattan is the oldest and the most densely populated of the five boroughs of New York City. Located primarily on the island of Manhattan at the mouth of the Hudson River, the boundaries of the borough are identical to those of New York County, an original county of the state of New York...

, an area well served by transit, were receiving a parking subsidy.

An effort was begun in 1984 to redress this situation by creating a federal tax incentive for transit that employers could offer to employees. In response to a congressional request contained in the Deficit Reduction Act of 1984
Deficit Reduction Act of 1984
The Deficit Reduction Act of 1984 , also known as the DEFRA, was a federal law enacted in the United States in 1984. Originally part of the stalled Tax Reform Act of 1983, it was adjusted and reintroduced as the Tax Reform Act of 1984. After passing in the House, it was merged with the Senate...

, the IRS agreed to allow employees to provide a $15 monthly transit fringe benefit to employees. TransitCenter in New York was created by the area transit agencies working with local governments and the business community, and funded by the federal government, to create a program to sell this benefit to employers as one way to reduce congestion.

In 1993, as a result of the success of the TransitCenter program that was called TransitChek and the increasing cost of transit commuting expenses, a new section of the Internal Revenue Code was enacted to consolidate employer provided tax benefits for commuting under a single statutory provision and to expand incentives for transit and vanpooling. This new provision, section 132(f), increased the monthly cap for transit and vanpooling to $60 a month, limited the parking benefit to $155 a month and added an annual index that increased the monthly caps in $5 increments as the cost of living increased. However, the tax free benefits were limited to employer paid benefits until 1998 when the Internal Revenue Code was further expanded to permit as an alternative pretax or employee financed commuter benefits. The current commuter benefit program is a consequence of these changes.

One other major change in the interpretation of the commuter benefit law occurred in late 2006 concerning the growing use of debit cards for transit benefits, an issue not addressed in the statute or in previous regulations. In response to the growing use of debit and credit cards (and other electronic media) for purchases for transit passes, the IRS issued a new set of guidelines to take effect beginning January 1, 2010. The new ruling states that a debit card (or other electronic media) used to provide transit benefits must be restricted for use only at those points of sale where only transit fare media, tickets, and passes are sold (terminal limited debit cards) to qualify as self-substantiating so that they could be categorized as transit passes. Debit cards that are not terminal limited are considered cash reimbursement and require substantiation.

Employer provided transit passes and van pooling

For the 2009 tax year regular employees are allowed up to $120 a month [$230 a month beginning March 1, 2009 following the signing of the Economic Stimulus Plan on February 17, 2009] for the combined value of employer provided transit passes plus commuting on an employer's van or bus. Any amount over the tax free amount is should be included in gross income.
Qualifying transit passes include tokens, fare cards, or vouchers for mass transit or private transportation businesses
Qualifying van or bus pool vehicles much seat at least six passengers and be used at least 80% of the time for employee commuting.

Parking provided by employer

For the 2009 tax year regular employees are allowed up to $230 per month in tax free parking or subsidized up to that amount. Any amount over the taxable amount should be included in gross income. According to the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

 (IRS), parking benefits are to be valued according to regular commercial price for parking at the same or nearby location.
Parking must be on or near the employer's premises, at a mass transit
Public transport
Public transport is a shared passenger transportation service which is available for use by the general public, as distinct from modes such as taxicab, car pooling or hired buses which are not shared by strangers without private arrangement.Public transport modes include buses, trolleybuses, trams...

 facility such as a train station or car pooling
Carpooling , is the sharing of car journeys so that more than one person travels in a car....


Bicycle commuter expenses

Beginning in 2009, employers may reimburse bicycle commuters up to $20 per month tax free for each month a bicycle is used for transportation between the employee's home and place of employment. Reimbursement may be for reasonable expenses incurred for the purchase of a bicycle, bicycle improvements, repair and storage. Bike commuters who receive any other transportation fringe benefit under Section 132 are not eligible to receive the bike commuter benefit. The bicycle commuter benefit was added to IRS Code 132(f) as part of the Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...

, signed into law on October 3, 2008.

The bicycle benefit differs from the transit and parking benefit in a few ways:

1. The bicycle benefit may not be funded by an employee’s pretax contributions; instead, it is reimbursed by an employer as a fringe benefit. Because this is a reimbursement, a “bona fide reimbursement” process must be utilized by the employer whereby the employee substantiates the expenses with receipts, or a certification in the absence of receipts, that the expenses were incurred for the eligible purpose.

2. The bicycle benefit may not be received in any month in which an employee receives any other qualified transportation fringe benefit (i.e., transit pass, transportation in a commuter highway vehicle, or qualified parking). Thus, if an employee receives a non-bicycle transit benefit in a particular month, the employee is not eligible to receive the bicycle benefit for the same month, even if the employee commuted occasionally to work using a bicycle during that month.

3. Reimbursement for bicycle-related expenses may be paid for eligible expenses incurred during the year in which the employee commuted by bicycle. Substantiation for the expense must be submitted within a reasonable period of time after the expense was incurred, which is typically within 180 days. These expenses may be paid through a period not to exceed three months following the expiration of the year in which the expenses were incurred. Thus, if the expense is incurred in 2009, the employee has through March of 2010 to file for and receive the reimbursement.

4. The bicycle benefit is not tied to the cost of living index, which applies to both transit and parking benefits. Unless amended in the future, the bicycle benefit is fixed at $20 per month.

Administration of Commuter Benefit Programs

There are several ways that employers implement commuter benefit programs. The most direct way is for employers to administer the program themselves arranging for transit passes, for example, to be sold or given to employees at the worksite. Thus, companies can contact a transit agency and purchase passes for their employees each month and use the employees’ pretax deductions to pay for the passes or provide the passes free to the employees as a fringe benefit. Alternatively, commuter transportation benefit providers offer transit benefit products like transit vouchers and transit debit cards for sale to employers that can be used by employees to purchase transit passes from any transit operator in an area. Because these approaches require time and effort of the company to identify which employees want to participate, what kind of pass or product they need and to handle distribution, this option is most often used by small and medium size companies. However, a few transit operators across the country have well established pass sale programs involving large corporations who want to contribute to the well-being of their community by participating in these types of programs.

More and more, medium and large companies have sought the assistance of third party administrator
Third party administrator
A Third Party Administrator is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. This can be viewed as "outsourcing" the administration of the claims processing, since the TPA is performing a task traditionally handled by the...

s (TPAs) or commuter benefit providers to handle all the administration for their employees. In these cases, the provider will carry out enrollments, product selection, distribution and customer service for the company. In addition, the providers or TPAs handle all of the compliance issues necessary to ensure that the products and services are in conformance with IRS regulations. In exchange, the employer will pay a service fee to cover administrative expenses. Many of the largest companies located in major metropolitan areas where there is available transit utilize such providers.

Treasury Regulations

United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...

Regulations provide for an additional type of transportation benefit. The value of a special vehicle design (such as bulletproof glass) intended to provide security is excludable from gross income if the design is for a bona fide business-oriented security concern.


  • Transit Benefits: Same as commuter benefits but more specific to use of mass transit services such as commuter rail lines or buses.
  • Qualified Transportation Fringes:' Used in tax legislation to refer to benefits for transit, vanpool, and qualified parking expenses.
  • Commuter Highway Vehicle: a tax law term for vanpool as defined in section 132(f)(5)(B)
  • Commuter Benefits: Refers to employer-provided benefits under section 132(f) of the tax code and covers tax-free transit, vanpool, or parking benefits.
  • Fringe Benefit: An employment benefit (such as paid holiday time or gym membership) that has a monetary value but that does not affect an employee’s taxable gross income (As opposed to offering a benefit pretax, meaning an employee’s pretax deductions pay for the benefit and reduce taxable income).
  • Fare Card: a general transportation industry term that refers to a card or ticket that a transit rider can use to ride on a public transit system.
  • Transit Pass: defined by IRC section 132(f) as a means any pass, token, farecard, voucher or similar item used for transit.
  • Transit: term used to refer to any form of rail, bus or ferry operated by a public or private entity.
  • Tax-free: with reference to commuter benefits generally refers to an amount that for tax purposes is excludable from gross income. Can be either a fringe benefit (in addition to compensation) or pretax (in lieu of compensation).
  • Pretax: payroll deductions made before tax liabilities are calculated.

Further reading

Public Transportation and Petroleum Savings in the U.S.: Reducing Dependence on Oil

Unleash the Power of Public Transportation

The Texas Transportation Institute's 2007 Urban Mobility Report and Appendices

APTA's 10 Ways to Enhance Your Community: Unleash the Power of Public Transportation (direct link instead of TransitCenter's website link as currently listed

Driving Down the High Cost of Commuting

University of South Florida National Center for Transit Research Publications page

The Impact of Commuting on Employees

NYU's Ruding Center for Transportation Policy and Management

The Road to Green http://www.transitcenter.com/uploadedFiles/Transit_Resources/IndustryInformation/The_Road_To_Green.pdf

About.Com article on Public Transportation and the Environment
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