Monthly Limit on Pre-Tax Commuter Benefits Increased for 2013… and 2012

Transit commuters were given an unexpected New Year’s gift in the recent “Fiscal Cliff” deal. A little publicized provision of The American Taxpayer Relief Act of 2012 significantly increased the amount that employer sponsored Transportation Expense Reimbursement Plans can reimburse employees each month for mass transit and van-pooling expenses. The temporary benefit increase applies to both 2012 and 2013.

Transportation Expense Reimbursement Plans allow employees to effectively pay for expenses relating to commuting to work with dollars that are exempt from federal, state, local and payroll taxes. The plans operate via employer reimbursements to employees of eligible expenses. The costs of the reimbursements are funded by pre-tax employee salary deductions. The resulting savings can exceed over 50% of the excluded amount for some employees.

Expenses eligible for reimbursement by Transportation Expense Reimbursement Plans include parking fees, mass transit passes and van-pooling charges. The Internal Revenue Code limits the amount that employees may be reimbursed for eligible expenses each month. The limits are divided into two categories which each have separate limits: parking expenses and transit expenses (which included both mass transit and van-pooling).

Historically, the tax code has provided significantly higher limits for parking expenses than for transit expenses. In 2009, the federal government temporarily equalized the limits by raising the transit limit to the same level as the parking limit. That increase expired at the end of 2011. Section 203 of the “Fiscal Cliff” deal amended the tax code to extend the parity of the two limits until the end of 2013.

The result is that the monthly reimbursement limit for transit expenses for both 2012 and 2013 is now $240. The separate limit for parking remains $240 for each year.

For employer Plan Sponsors of Transportation Expense Reimbursement Plans, the necessary adjustments for 2013 are straightforward. The increased limit should be communicated to Plan Participants and other eligible employees along with an opportunity to adjust their pre-tax salary deductions. Any changes should be processed through payroll and communicated to the Transportation Plan Administrator.

Adjustments for 2012 are more problematic given that the amendment to the tax code was not implemented until after 2012 ended. Implementing a retroactive change requires further guidance from the IRS on allowable procedures for adjusting Plan Participants’ taxable income. Admin America expects this guidance to be provided very quickly as the situation would appear to prevent the filing of individual federal income tax returns until clarification is provided. We will provide additional guidance as it is released by the IRS.

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