Clarifying the Tax Cuts and Jobs Act Impact on Commuter Plans

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Published July 2, 2018

The Tax Cuts and Jobs Act was signed into law at the end of 2017. There still seems to be some confusion in the market as to how this law impacted Commuter Plans. The information below should help clarify some of this confusion.

1) The Tax Cuts and Jobs Act did not have any direct impact to employees who participate in a Commuter Plan. Employees can still make tax-free salary reduction contributions for qualified transit and parking expenses which are incurred to get to and from their home and place of work.The maximum tax-free election for 2018 is $260 per month for mass transit and qualified parking.

2) The Tax Cuts and Jobs Act eliminated the ability for employers to receive corporate income tax deductions for fringe benefits they provide, including qualified transportation expenses. Because the Tax Cuts and Jobs Act reduced corporate income tax rates, there are some benefits and other items they can no longer write-off. This is best illustrated with an example:

Assume an employee earned $40,000 per year and put $1,000 over the course of a year into a Commuter Plan. Under previous law, the employer could write-off all $40,000 of the employee’s compensation as an operating expense. Under the Tax Cuts and Jobs Act, the employer cannot write-off any compensation that is directed into a Commuter Plan. As a result, the employer can only write-off $39,000 of the employee’s compensation in this example.

Similarly, if an employer contributed directly to an employee’s Commuter Plan, the employer could not write-off that contribution for corporate income tax purposes. However, the employee could still receive any employer-funded contribution income tax-free.

Contributions (whether made by the employee or employer) still avoid Social Security and Medicare taxes for both the employer and employee.

This all took effect on January 1, 2018.

3) The Tax Cuts and Jobs Act suspended the qualified bicycle commuting benefit through 2025. The employer-funded $20 maximum monthly bicycle benefit must be treated as taxable compensation to employees if employers continue to make this benefit available. This also took effect on January 1, 2018.