Commuter connections: helping employees reduce their commuting expenses can cut employers' costs, too

HR Magazine, July, 2004 by Carolyn Hirschman

If Carol Boatright drives to work, it costs her 45 minutes to an hour of her time each way plus expenses for gasoline and the wear and tear on her car. Instead, she prefers to use a vanpool program provided by her employer, Georgia Power Co. The program spares her the hassles of driving and cuts her travel time each way to 35 minutes--and it's free.

Georgia Power's vanpool arrangement is one of the commuting benefits used by 2,000 of its Atlanta-area employees. Such benefits for trimming employees' commuting costs are aimed at reducing rush-hour traffic congestion and vehicle emissions by giving workers tax-saving incentives to leave their cars at home. Employers also can get a break through lower payroll taxes when they sponsor commuting benefits that employees pay for with pretax dollars. In addition, advocates say, such benefits cost companies little to run and can boost employee morale.

"There's less frustration with the vanpool," says Boatright, a communications coordinator who lives in Jonesboro, Ga., and works 22 miles away in downtown Atlanta. "When I drive, I can't plan. I might get caught in traffic. The vanpool is more dependable," partly because it uses less-crowded lanes reserved for high-occupancy vehicles. What's more, she says, it's less stressful.

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Commuting benefits include mass transit costs, vanpools and certain types of parking arrangements. Such benefits are usually set up so that employees pay transit costs from pretax income, while employers pay the programs' management costs. Programs can also be run by one of the dozen or so third-party administrators (TPAs) that specialize in commuting benefits.

Some employers pay all or some of participating employees' costs. Georgia Power, for example, picks up the entire bill, spending about $900,000 per year for vanpools and bus passes, says Jane Franklin, special projects coordinator.

ICF Consulting, an 800-person firm based in Fairfax, Va., contributes $32.50 per month toward transit costs for each participating employee, says benefits specialist Laura Slaton. The company's yearly tab for commuting benefits for 177 participating employees in Fairfax, Washington, D.C., San Francisco and Lexington, Mass., comes to about $57,000 a year, she says.

Tax Relief And Other Pluses

Regardless of how commuting benefits expenses are shared, they confer tax breaks. Employers' costs are tax-deductible as business expenses. Employees' costs typically are paid with earnings set aside before taxes, which can amount to tax savings of as much as $40 per month, according to WageWorks, a commuter-benefits provider based in San Mateo, Calif. And unused pretax amounts earmarked for commuting can be rolled over from year to year.

In addition, employers' payroll taxes are reduced through the pretax arrangement. "Every dollar that an employee puts in ... comes off the tax base," notes Jon Kessler, chairman of WageWorks. "These are programs that immediately produce financial returns for the employer if they're well run."

Moreover, several states offer tax breaks for commuter benefits. Maryland, for instance, gives employers a 50 percent tax credit, limited to $50 per employee per month, for the costs of plans that meet Internal Revenue Service (IRS) rules. The Maryland tax break also applies to guaranteed-ride-home programs, which ensure that employees using the vans have a ride home in emergencies or if they work late, and parking cash out, in which employers offer employees cash to give up their employer-subsidized parking spots.

Commuting benefits work well in large cities with good public transportation as well as smaller cities where workers have long commutes, experts say, and also boost recruiting and retention, especially when labor is tight.

"Within a year or two, hiring will be more competitive. These kinds of pretax programs ... should be considered," says Joan Rhodes, CEO of Employee Benefit Specialists Inc., a TPA based in Pleasanton, Calif.

Says ICF's Slaton: "Recruiting-wise, it has a big advantage. Being an environmental consultant, doing a lot of work for the EPA [U.S. Environmental Protection Agency], it's important to our employees."

The Federal Mechanics

Three types of "transportation fringe benefits" are eligible for favored tax treatment, according to the IRS. One type--the most widely used--pays for transit passes such as fare cards and tokens for public or private rail systems, buses, streetcars and ferries. Another category covers "commuter highway vehicles"--vans that seat seven or more adults, including the driver. The IRS allows pretax benefits of up to $100 per person per month for vanpools and mass transit combined.

The third type of benefit centers on parking costs, generally the costs of parking at a location where the employee then transfers to public transportation or, like Georgia Power's Boatright, boards a commuter van. The IRS pretax allowance for employees for such parking costs is up to $195 per month.

If commuting costs exceed the IRS limits, employees pay the difference out of taxable income. The IRS adjusts the limits for inflation, although not every year.