The employer requirement to offer employees the option of purchasing commuter transit benefits on a pre-tax basis via payroll deduction took effect this year on January 1 in two major metropolitan cities – New York City and Washington, DC.
Perhaps not surprisingly, this trend began in California as San Francisco and Berkeley, along with nine counties in the San Francisco Bay Area, have had this requirement in place for some time. Also this year, Hawaii cleared the way for counties to adopt a commuter benefits mandate.
And it’s a trend that’s not likely to slow any time soon. Employees like commuter benefits because they get options besides driving to work every day and paying increasingly unaffordable amounts in gas and tolls, not to mention arriving at the office already stressed out and rumpled from endless traffic.
Plus employees get the convenience of budgeting annual costs via prepaid transit tickets that actually lower their taxable income. And for employers, if employees’ taxable income is lower, employers’ payroll taxes are lower too.
Any incentive to get people to make greater use of mass transit also benefits society in general because of the positive environmental effect, including reducing the number of motor vehicles on the road and harmful fuel emissions.
But are these programs burdensome or easy for employers to administer? That depends on which city we are talking about.
NYC, notorious for its long, difficult and costly commutes to work by massive numbers of people, provides a good example of the potential amount of effort and attention to detail that employers in other cities could face in complying with similar new laws.
New York City’s Law – A Case Study
The new law in the Big Apple requires employers with 20 or more full-time employees (FTEs) working in the city to offer each of those FTEs the option of using pre-tax pay deductions to purchase qualified (as defined by federal Internal Revenue Code § 132) mass transit fringe benefits, other than employer-provided parking.
In NYC, these qualified mass transit fringe benefits include:
- Train and bus passes;
- Ferries; and
- Vanpools (if qualified).
Pre-tax deductions to pay for carpooling and bicycle benefits, including CitiBike, are not permitted because they are not allowed under the Internal Revenue Code.
NYC employers cannot deduct any fees from their employees’ compensation to pay administrative costs incurred in setting up a commuter benefits program, and they must notify all FTEs about the program. Employers also have the option of instead reimbursing employees for their commuting expenses in accordance with federal requirements.
Who’s an FTE?
The definition is expansive and even affects employers in other states. It includes:
- Employees working for a single employer for at least 30 hours a week in the most recent four weeks (as of any date), any portion of which was in NYC, including all five boroughs – Brooklyn, Queens, the Bronx, Manhattan and Staten Island;
- Employees who meet the initial FTE threshold, but whose work hours are later reduced (they are still entitled to the benefits); and
- FTEs who work outside of NYC, but whose job responsibilities require them to work occasionally in NYC, so long as they worked for some portion of the 30 or more hours in NYC. For example, New Jersey and Connecticut employers often send employees to NYC on business due to its close proximity, so they would be entitled to the benefits as well.
New FTEs must be notified about the program by the fourth week on the job.
NYC employers have to meticulously calculate FTEs
All employees at all of an employer’s NYC facilities must be counted to determine whether the 20-employee threshold is met.
If you qualify under the above calculation, but later reduce your payroll to fewer than 20 FTEs, you still have to continue to offer the commuter benefits to the remaining FTEs as long as they work for you.
The number of FTEs is determined by calculating the average number of FTEs for the most recent consecutive three-month period. So if you have been in business for fewer than three months, you must still count the number of FTEs by calculating the average number of FTEs per week for whatever amount of time you have been in business.
Five categories of NYC employers are excluded from the requirement to offer commuter benefits, including:
- Those whose employees are covered by a collective bargaining agreement (CBA). However, if 20 or more FTEs are not covered by the CBA, the employer must offer the benefits to those employees;
- Government employers;
- Employers that are not required to pay federal, state and city payroll taxes;
- Employers that obtain a waiver from the requirement (e.g., due to a severe financial hardship); and
- Employers that already provide employees (at the employer’s own expense) with a transit pass for transportation on every mode of eligible public or privately owned mass transit (some limitations apply).
Detailed Recordkeeping Helps Prevent Penalties
Keeping good records is very important because, under the NYC law, they can be used to prevent having to pay a potential noncompliance penalty. Records must be kept for at least two years and should indicate that the employer: (i) offered each eligible FTE the opportunity to use pre-tax income to purchase commuter benefits, and whether the employee accepted or declined the offer; or (ii) provided employees, at its own expense, with a transit pass or similar form of payment for commuter transportation at the maximum pre-tax level permitted by federal law for transit expenses.
Records may be documented on a model form developed by the Department of Consumer Affairs and kept electronically.
Enforcement of noncompliance penalties kicked in on July 1. So if you are subject to this law and haven’t launched one of these programs yet, you have no more time to wait. There is a civil penalty of $250 for the first violation and for any subsequent or recidivist violation (these terms are specifically defined in the law). Fortunately, a so-called 90-day cure period is provided.
DC’s Law is Less Complex
By comparison, the law in Washington, DC does not require a complicated FTE calculation. It applies simply to employers with 20 or more employees, period. But DC employers beware – the mayor is authorized to expand the definition of covered employers starting in 2017.
But like a wolf in sheep’s clothing, the noncompliance penalties in DC are stiffer than NYC’s are. A covered DC employer that fails to offer at least one transportation benefit program may be subject to civil fines and penalties ranging from $50 to a whopping $16,000!