Tax Cuts and Jobs Act impact on Qualified Transportation Plans

Before Congress passed the Tax Cuts and Jobs Act (TCJA) on December 20, 2017, employers who wanted to help employees with parking, transit, vanpool or bicycle commuting expenses could offer a Qualified Transportation Plan (QTP) and choose between three plan designs:

  1. The employer pays the employee’s transportation expenses
  2. The employees pay for transportation expenses with pre-tax dollars (excluding the bicycle commuting reimbursement which can only be provided by the employer, option 1 above).
  3. A combination of both employer contributions and employee pre-tax payments

I espoused the benefits to employees of plan designs 2 or 3 in a July article. However, my article preceded the Tax Cuts and Jobs Act. And, unfortunately, either Congress read my article and decided it was too good for employees and cut it, or they didn’t read the article and didn’t realize what an awesome benefit they were messing with.

So, sadly, today I am writing a revised article that captures the impact of what happened to an employer’s motivation to continue offering the QTP with the passage of the TCJA.

The good news

If an employer offered plan design choice 2 where the employee pays 100% of the commuting expense themselves with pre-tax dollars, there is no impact on the employer after the Act.  For these employers it is business as usual and no changes are required to their QTP.

The not-so-good news

If an employer was paying for/contributing to/subsidizing employee parking, transit, vanpool or bicycle commuting expenses, they might choose to discontinue that practice because it is no longer a business expense.  Section 274(a) of the Internal Revenue Code will include a new provision that disallows deductions for “the expense of any qualified transportation plan (as defined in section 132(f) provided to the employee.”  Section 274(l) generally disallows deductions for any expense incurred for providing transportation, payment, or reimbursement to an employee relating to travel between the employee’s residence and workplace.

Two small exceptions exist for employers.

  1. Expenses that are “necessary for ensuring the safety of the employee” between the employee’s residence and workplace will continue to be deductible as a business expense (Any guesses how long it will take the IRS to clarify what expenses or scenarios will qualify to ensure the safety of an employee?).
  2. Qualified bicycle commuting expenses, which, as noted above, can only be reimbursed by the employer, have received an eight-year grace period where offering this benefit will be a business expense to the employer. In other words, employers can continue to offer payment to employees who commute to work using bicycles “for the purchase of a bicycle and bicycle improvements, repair and storage if such bicycle is regularly used for travel between the employee’s residence and place of employment.”

Gina’s crystal ball

You may read many articles, as I have, predicting that employers will begin to eliminate this benefit altogether because it’s no longer a business expense.  However, I believe some employers will continue to subsidize employee transportation expenses because, 1) it attracts new, talented employees and 2) some of the other corporate tax savings to employers under the TCJA will offset the loss of this benefit’s tax advantages.

Additionally, some employers will switch from subsidizing this expense to making employees pay for transportation expenses with pre-tax dollars because the employer can still realize tax savings.  In this scenario, the employer will still enjoy the 7.65% FICA payroll tax savings for every dollar the employee pays with pre-tax dollars.  See the example below (please excuse the shameless piracy of the same illustration used in my first Qualified Transportation article, but it’s good one and illustrates my point):

  • Janet drives her car every day to the Bainbridge Island ferry terminal. She pays $130.00 per month to park her car.
  • She then rides the ferry to downtown Seattle, then catches a bus to her workplace. The cost of a ferry/bus Orca card is $180.00 per month.
  • Total monthly transportation expense: $130 + $180 = $310/month

If her employer offers a QTP, she can pay for both expenses with pre-tax dollars.  A lower income employee would expect to save 25% in payroll taxes = $77.50 per month or $930 annually!  Even the employer benefits by not paying the 7.65% in payroll taxes, saving $23.72 per month or $284.64 annually!  This savings can add up when you consider the payroll tax savings across all employees.

So, while the TCJA did indeed deal a hard blow to these once increasingly popular benefit programs, there are still financial and motivational reasons to offer QTPs.  If you are an employer or the broker of an employer who needs to offer a Qualified Transportation Plan, we’re here to help.



Like it? Share it!