Commuter benefits are not a new concept. In fact, employers have been offering their employees commuter benefits since 1993 when they were added to IRS tax code section 132(f). Commuter benefits have recently received renewed attention after the pandemic when employees started going back into the office. Employees realized how much money they had saved by working from home (about 19% of their annual income). 

Commuter benefits are a way for employers to help employees save money on, or even pay for, the cost of their commute.

What are commuter benefits?

Commuter benefits are employer-sponsored benefit accounts that allow employees to either save money from their paycheck, pre tax, to pay for their commuting costs, or they are employer-funded accounts from which employees can reimburse for commuting costs. 

Pre-tax accounts can be funded by employees or their employer and cover costs associated with using mass transit, carpooling, or parking a personal vehicle near the office or mass transit center. 

Employer-funded commuting or micromobility benefits are accounts that can be used by employees to reimburse for commuting expenses associated with riding their bike to work, gas stipends, Uber or Lyft, and other expenses that aren’t covered by a pre-tax commuter benefit account. Employees must pay income taxes on the reimbursements they receive through employer-funded accounts.

The top 10 most common questions asked about commuter benefits

1. Are commuter benefits taxable?

It depends. Commuter benefits can be offered through two different types of accounts. A pre-tax commuter benefit account is when employees deposit money, up to the IRS monthly limit, from their paycheck before income taxes are assessed. The commuting expenses that are eligible for reimbursement through the pre-tax account are those associated with mass transit like bus and subway fares, metro passes, train tickets, ferry fees, trolley tokens, etc. In addition, employees can reimburse for parking for their personal vehicle near their office or a mass transit center, and carpooling costs. Reimbursements employees receive through their pre-tax commuter benefit account are not subject to income tax.

A post-tax employer-funded commuter benefit account, such as Lively’s Reconnect Lifestyle Spending Account, is fully funded by the employer. It can be used to reimburse for expenses related to biking to work, gas stipends and the use of ride share services like Uber and Lyft. Expenses employees reimburse for through the employer-funded commuter benefit accounts are subject to income tax. 

2. Are commuter benefits worth it?

A benefit is only valuable if it’s used. So, if your employer offers a pre-tax commuter benefit account and you currently take mass transit to work, or you have to option to take mass transit to work (and it’s a viable option for your schedule), or you drive your personal vehicle to work and have to pay to park it near your office, or if you carpool, then participating in your company’s commuter benefits plan could help you save money. If you decide to participate, make sure you know what your plan’s policy is for rolling over unused contributions month-to-month and make sure you’re only contributing what you think you’ll use in a given month.

If your employer offers an employer-funded, post-tax commuter benefit, then it might be valuable to participate in case you incur an eligible expense. In the case of the employer-funded account, you’re only taxed on the reimbursements you receive. 

3. Are commuter benefits “use it or lose it”?

The IRS defines that under the “use it or lose it” rule, certain plans must require that unused contributions or benefits remaining at the end of the plan year must be “forfeited.” Because commuter benefits continue to roll over from month-to-month, and year-to-year and do not have a designated “plan year” or plan end date, this specific rule, as defined by the IRS, does not apply. 

However, you should be aware that the IRS specifically outlines that any money left in a commuter account when an employee leaves the company, either by retirement, termination, or otherwise may no longer use their funds for expenses incurred after the date they leave the company. Any remaining funds in the account will be forfeited back to the employer and can not be returned to the individual. 

Because commuter accounts allow you to change your election on a monthly basis, it is important to contribute only as much as you are going to use each month into your commuter account. If you ever find that your balance is higher than what you know you will be able to spend, it’s good practice to reduce your monthly elections until you have spent down your additional funds, in order to not lose money in the case that you are unexpectedly terminated.  

4. Can commuter benefits be refunded?

No. Once you contribute money to your commuter benefits account, you must submit eligible expenses for reimbursement in order to “get your money back” or use the contributed funds using your commuter debit card on eligible expenses. The IRS prohibits employers from refunding commuter benefit contributions.

5. Can commuter benefits be used for gas?

Pre-tax commuter benefits contributions can’t be used to pay for gas for an employee’s personal car. But if an employer offers employees a gas stipend through an employer-funded, post-tax account, employees could be able to reimburse for gas expenses through this benefit. Any expenses reimbursed for through the employer-funded account are subject to income taxes.

6. Can commuter benefits be used for taxis, Uber, or Lyft?

Pre-tax commuter benefit accounts can’t be used to reimburse for taxis or ride hailing services like Uber and Lyft. Even the rideshare option through ride hailing services is not eligible for pre-tax reimbursement. However, if your employer offers a post-tax commuter benefit account, they could allow you to reimburse for ride hailing, regular Uber or Lyft services, scooters, e-bike rentals, or rideshare services through these providers.

7. How do commuter benefits work?

Pre tax and employer-funded commuter benefits each work a little differently. For pre tax commuter benefit accounts, employers choose their benefits administrator, decide if they would like to contribute to the account, and offer employees the opportunity to participate in these benefits at any time of the year. If employees decide they want to participate, they will also choose how much they want to contribute to their commuter benefit account each month (up to the 2024 IRS limit of $315 per month, minus any employer contribution). The employer will then take the appropriate amount from each paycheck, and deposit any contribution on their end into the account. Once employees incur an eligible commuting expense, they can complete their benefits administrator’s process for reimbursement or use a commuter benefit debit card (if available) on any eligible expense .

For employer-funded, pre-tax commuter benefit accounts, employers will choose a benefits administrator and design their commuter benefits plans. That will include choosing the types of commuter benefits they would like to reimburse for and how much will be allocated to each employee’s account. Employers will give their employees the opportunity to participate in the benefit during open enrollment. Unlike the pre-tax account, this type of account would be fully funded by the Employer and would not have the option to have Employee contributions. Employees who choose to participate will complete the benefit administrator’s required process for reimbursement once they have incurred an eligible expense. Employees will pay income taxes on any expense reimbursements they receive.

8. Can commuter benefits be used for parking?

Pre-tax commuter benefits can be used to pay for parking within a one-mile radius of the office or mass transit center, and in some instances from places that you must visit for work. Eligible parking related expenses include parking meters, and parking lots. 

9. Can commuter benefits be used for tolls?

Employees with pre-tax benefit accounts can’t reimburse for bridge and tunnel tolls or passes like Fast Pass or E-Z Passes.

10. Can commuter benefits be refunded by the employer, per the IRS?

No. That’s why it’s important for employees to only contribute what they think they’ll use each month. Employers can allow employees to roll over their unused contributions from month-to-month and year-to-year, but once the employee leaves the company they cannot be reimbursed for any expenses that have not already been incurred by that date. The IRS prohibits employers from refunding unused contributions to commuter benefit accounts to employees.

For more information about commuter benefits and answers to employee and administrator questions, consult our comprehensive commuter benefits guide.

Get innovative, flexible commuter benefits with Lively

Lively is your partner in offering the most impactful benefits package for your employees. Lively offers easy-to-use pre-tax commuter benefits with in-demand features such as mobile payments and tap-to-pay. In addition, employees can stop or adjust their contribution at any time to match their changing schedules and needs. Lively also offers the post-tax “Reconnect LSA” to pay for sought-after perks such as scooter, bike and ride shares, gas, and even meals at the office. If you’re ready to uplevel your benefits offerings, reach out today.