Tax Reform Impact: Employers Should Evaluate the Cost of Employee Transportation Benefits
By D|K’s Labor and Employment Team
One of the changes included in the final tax reform bill last year was the elimination of the employer deduction of the cost of company-provided parking and transit expenses. As a result, companies that either pay for employee parking or reimburse transit fees should evaluate the financial effect of the changes and decide whether to continue providing the benefit.
Prior to tax reform, employers could deduct the cost of providing employees with “qualified transportation expenses” such as parking and transit fees. In addition, employees receiving these benefits could deduct their value, up to a monthly limit ($260 for 2018). Many employers maintain pre-tax transportation expense plans that function in a manner similar to flexible benefit plans. Each participant has an individual account from which to pay eligible expenses, and the accounts may be funded through employee pre- tax contributions, employer contributions, or a combination of both.
Elimination of the Employer Deduction
Going forward, employers that pay parking or transit fees will not only lose the tax deduction for such expenses, but will also be required to include the value of the benefit in the calculation of FICA taxes. Companies that provide these benefits, whether through contributions to a transportation plan or direct payment, should calculate the net increase in the cost of these benefits. Depending on the size of the company and the number of employees, an employer may decide that the benefits are too expensive to continue.
A significant fact for employers to consider in looking at their transportation benefit programs is that individuals remain eligible to deduct qualified parking and transit expenses. If a company decides to discontinue an employer-paid transportation benefit as a result of the new tax law, it could establish a pre-tax transportation expense plan that is funded entirely with employee contributions.
Note: Unlike the cost of employer-provided transportation benefits, employee pre-tax contributions to a transportation expense plan are not subject to FICA tax.
If a company decides to continue providing transportation benefits, it should confirm with its payroll provider that the value of these benefits is included in employees’ wages for purposes of calculating FICA tax liability.
Please contact your Davis & Kuelthau attorney, or our Employee Benefits practice chair linked here.