Aims to reduce congestion, emissions
Beginning next year, a new law in Seattle, Wash., will require employers to give their employees the option to make monthly pre-tax payroll deductions to pay for transit or vanpool expenses.
The new requirement is designed to reduce traffic congestion and carbon emissions by encouraging workers to use transit other than single-occupancy vehicles to travel to and from work.
Seattle’s municipal government passed the Commuter Benefits Ordinance last fall, joining cities such as New York, San Francisco, and Washington, D.C. that have passed similar laws.
As of Jan. 1, 2020, businesses in Seattle with at least 20 employees worldwide will have to set up a before-tax payroll deductions program that allows employees to buy transit passes (or pay for similar costs), up to a maximum allowed under U.S. tax law. Alternatively, employers can comply by paying for all or part of the cost of transit passes for their workers.
For 2019, the Internal Revenue Service exempts up to $265 (all dollars U.S.) per month from an employee’s income in employment benefits for transit passes or for transportation to and from work in a commuter highway vehicle (for example: a van that seats at least seven adults including the driver) and for qualified employer-provided parking.
Employers who are tax-exempt organizations or government agencies will be exempt from Seattle’s new rules.
Once in effect, the new requirements will apply to employees who have worked at least an average of 10 hours a week in the previous month.
Employers will be required to offer the program within 60 days of an employee beginning work; however, it will not be mandatory for employees to participate. If an employee chooses to, employers will have to begin payroll deductions within 30 calendar days.
Cities that have already implemented commuter benefits laws say requiring employers to deduct the cost of transit expenses from employees’ income before calculating payroll deductions can reduce costs for both employees and employers.
“Employees can lower their monthly expenses when they use pre-tax income to pay for their commute,” said documents on the New York City program.
“An employee with a tax rate of 35 per cent who elects to pay $200 per month on transportation with pre-tax income can save $70 a month, for a total savings of $840 a year,” it said.
New York’s program, in place since 2016, applies to employers with at least 20 employees.
With employees’ taxable income lower, employers can save on payroll-related taxes such as Medicare and social security, as well as federal and state income taxes, said documents from the San Francisco Department of the Environment (SF Environment), which runs the program.
“(Employers) may see up to nine per cent savings for each employee participating in the benefit. The more employees that participate, the greater the savings to the employer,” they said.
San Francisco’s ordinance, which has been in place since 2009, requires businesses in the city to offer commuter benefits if they employ at least 20 employees across the country. It operates alongside a similar law in the surrounding Bay Area.
Under San Francisco’s and Washington’s laws, employers can comply with the requirements by providing pre-tax payroll deductions for employees, subsidizing employees’ transit and vanpooling costs, providing transit services for employees, or offering a combination of the three.
Although there can be tax savings, providing commuter benefits is not necessarily cost free. For employers who subsidize or provide transit services, there is a cost to providing the service. For employers who offer a pre-tax payroll deductions program, there may also be added expenses.
Employers who manage the program themselves must take employees’ transit pass orders, make payroll deductions, buy the transit passes (or other transit benefits) and distribute them to employees, as well as answer their questions. They may see additional costs if they need to hire more staff to run the program.
Employers can opt to hire a third-party vendor to take on some or all of the responsibilities, but they will have to pay the vendor to provide the services. SF Environment estimates that a fully outsourced program costs an average of $3 to $5 per employee, per month.
While there may be some additional costs for offering commuter benefits, SF Environment said overall the program is low cost or cost neutral for many employers, especially when compared to other benefits.
In addition, it said commuter benefits could help improve recruitment and retention.
“Commuter benefits have proven to be a cost-effective tool for increasing job satisfaction and helping recruit and retain talent,” it said. “They (employees) arrive at work relaxed, less stressed from traffic congestion and ready to be productive, boosting morale and enhancing the work environment.”
Washington, D.C.’s District Department of Transportation said employers with commuter benefit programs can be “seen as forward-thinking and committed to being a green workplace.”
Like New York, Washington D.C.’s program began in 2016. It applies to employers with at least 20 employees in the city.
To ensure that employers comply with the commuter benefits rules, the cities’ laws allow them to levy fines for violations. For instance, San Francisco levies fines of $100 for a first violation, $200 for a second one, and $500 for a third.
Seattle’s Office of Labor Standards, which is responsible for implementing the new law, is still working out its enforcement procedures.
While commuter benefits laws are slowly spreading in the U.S., the situation is different in Canada. Operating under different rules, most cities would be unlikely to adopt similar laws.
While the federal government could implement a commuter benefits program that allowed for pre-tax payroll deductions, it would likely first have to amend income tax rules to allow for a tax exemption.
Currently, if an employer pays for an employee’s transit passes or reimburses an employee for the cost of buying them, a taxable benefit arises.
Exceptions apply for passes provided to transit employees or retirees whose employer operates a bus, streetcar, subway, commuter train or bus, or a ferry service — as long as the passes are only for them to use.
There are provincial income tax exemptions in Quebec. Public transit passes provided to employees there are not taxable benefits if employers supply them or eligible paratransit passes primarily so that employees can travel to work from home.
Exemptions also apply in Quebec if employers reimburse employees for the cost of eligible subscription-type transit passes that are valid for at least one month or eligible paratransit passes, provided that the employees provide receipts.
However, if an employer pays employees an allowance to cover the cost of their transit passes, it is a taxable benefit in Quebec.
The federal government used to provide a 15 per cent non-refundable public transit tax credit for individuals on the cost of eligible transit passes.
However, the government eliminated it in 2017.
“Available evidence suggests that this credit has been ineffective in encouraging the use of public transit and reducing greenhouse gas emissions,” said a statement in the 2017 budget.
In place of the tax relief for transit users, the government opted to invest money in provincial/territorial projects to improve public transit.
“(The public transit tax credit) was very complex. There was extremely low take-up and the money is better spent actually investing in opportunities for more people to take transit,” said Prime Minister Justin Trudeau at the time.
“What is important in transit is investing in new transit lines, investing in new buses, making sure that we’re responding to the needs that municipalities are putting forward.”
