With tax reform legislation finalized, it’s time to start unpacking changes that will affect employers in the coming year and beyond.
The 2017 tax act, which was signed into law Dec. 22 by President Donald Trump (Pub. L. No. 115-97), makes significant changes to the tax treatment of transportation and commuter benefits.
Beginning in 2018, the law repeals employer deductions for parking and transit benefits, with an exception for ensuring employee safety.
Employees are still able to exclude employer-provided parking and transit benefits from their income and use salary reductions to purchase such benefits on a pre-tax basis.
The law makes the opposite changes to bicycle commuting reimbursements. Employers may continue to deduct bicycle commuting reimbursements offered to employees. However, beginning after Dec. 31, 2017, and before Jan. 1, 2026, employees are subject to income tax for employer reimbursements for bicycle commuting expenses, and the benefits can’t be purchased through salary reduction contributions.
‘Unusual’ Mix of Provisions
“It’s unusual because when you have a provision that is providing an incentive to do something, you usually get a consistent message. In this case, for most transportation fringe benefits, the value of the benefit will continue to be excluded from an employee’s income, but it will no longer be deductible for the employer,” Ed Leeds, counsel at Ballard Spahr, told Bloomberg Law.
“The exception to that is the bicycle commuting reimbursement benefit where the employer can get the deduction but the employee will not get the exclusion,” he said.
The elimination of the parking and transit benefits deduction is expected to generate $17.7 billion in revenue over the next decade. Congress expects that increase in tax payments to be offset for employers by lower corporate tax rates established by the new tax law.
What do these changes mean for employers? “It’s such a mixed message that we’re just going to have to see where it goes,” Leeds said. “Employers don’t like to have to go to employees and say we’re taking a benefit away from you.”
Don’t Forget About Local Laws
Employers considering cuts in commuter benefits should ensure they are complying with both federal and local laws. Cities such as New York and San Francisco require employers to offer a pre-tax commuter benefits program to employees.
In New York, employers with 20 or more employees must offer full-time employees the opportunity to use pre-tax income to purchase qualified transit benefits.
In San Francisco, employers with 20 or more employees have a choice between offering employees pre-tax transit benefit contributions, employer-paid public transit passes or reimbursement for equivalent vanpool charges, free transportation on employer-funded buses or vans, or a combination of the three benefits.
California has 16 cities with commuter benefits ordinances on the books, more than any other state. For more information, see the Bloomberg Law Local Commuter Benefits Chart (subscription required).
Gain a deeper understanding of the legal complexities of employee benefits and executive compensation with a free trial to Bloomberg Law: Benefits and Executive Compensation.
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