The Ultimate Guide to Commuter Benefits

How to offer and take advantage of employee commuter benefits for tax savings.

With 38% of employers calling employees back to the office five days a week, the commute to work is a hot topic. There are many aspects of commuting that can serve as pain points for employees, especially the time they spend on it (which is usually not productive time, either personally or professionally) and the cost. In fact, the average U.S. worker spends approximately 19% of their income on their commute each year. 

For companies that are either requiring employees to come back to the office, or would like to encourage their team to come back to working in person, commuter benefits can support your goals. These benefits can help you create a better work culture, reduce your tax burden, and improve your recruitment and retention efforts.

For brokers looking to stand out to potential clients and solidify their partnership with current ones, including commuter benefits in your suite of benefits can show clients you understand their challenges and can offer them solutions. Commuter benefits can help businesses reach a number of culture and recruitment goals, increase productivity, and even save them money. There are also certain cities and states that require commuter benefits, so offering an easy-to-use commuter benefit can help you better serve these clients who are legally bound to offer these benefits. 

For employees that have to commute to work, participating in your company’s commuter benefits program can save you money and make that return to the office less burdensome.

What are Commuter Benefits?

Commuter benefits are perks that help employees pay for the ways they commute to work, whether by transit, vanpool, shared rides, or driving and parking their car near their work location. They can function differently but most often provide an opportunity for employees to save on their commute and/or a way for employers to provide employees with a stipend for commuting. A typical commuter benefit account enables employees to save for their commute costs tax-free, though some offer add-ons of taxable benefits such as bike, ride, and scooter shares.

How Does it Work?

In addition to being required by some municipalities and states, commuter benefits can help employers solve a wide range of issues for employees, and can help to encourage company values, depending on the program they choose. There are many different types of commuting costs that can be reimbursed for, but the IRS only allows for certain “qualified” expenses, such as transit or parking, to be reimbursed for tax-free. 

So, employers must first decide which challenges they are trying to solve and company values they’re trying to encourage, and then pick the program that most efficiently addresses them. For example, if employers have a lot of employees that commute via bike and want to encourage more of that behavior, they should choose a commuter benefits plan that reimburses for expenses like bike repair or membership in a bike share. Employers that want to save on payroll taxes, are required to offer these benefits to their employees, or just want to help ease the frustration of commuting should choose a benefits program that helps employees pay for transit passes and parking near the office.

Employers can use a third party administrator to set up their commuter benefits plan. Employees will sign up for the plan during open enrollment. If the plan includes an account into which employees can save money for their commuting expenses, they will choose how much they want to contribute for the month and are able to change their election on a monthly basis based on their commuting needs. Employers will then take the appropriate amount from their paycheck. Funds roll over from month to month and year to year until an employee leaves their employer, retires, or becomes otherwise ineligible for their plan. 

If the commuter benefits plan offers tax-exempt reimbursements for qualified expenses, the employees’ payroll deductions should be entered as “tax-exempt” so the appropriate amount of taxes are withheld. 

IRS rules for tax-exempt commuter benefit accounts are as follows:

  1. The 2024 annual contribution limit is $315 per month per account (parking and transit). This annual limit includes contributions by both the employer and employee. Any contributed amount over $315 per month is considered taxable income. Employees also can not spend any more than $315 on a benefit out of either account per month otherwise they could lose the tax benefits of the account. 

  2. In order for employers to consider a transportation expense tax-exempt, they must have their expense qualified or adjudicated based on the employer plan rules and setup chosen.

  3. Only qualified expenses can be reimbursed tax-free. You can find the complete list of both tax-exempt and taxable transportation costs in the next section.

  4. Employers can’t deduct their contributions to employees’ commuter benefits accounts as a business expense. But they can enjoy the payroll tax deduction from employees’ contributions to tax-exempt accounts.

  5. There is no annual use-it-or-lose-it rule for unused contributions so balances left in pre-tax commuter benefit accounts typically roll over from month to month and into the next year. But an employer can structure their plan in a different way if they choose to. However, if an employee quits, retires, or is terminated, they should have a set period of time within which to use their account balance on expenses incurred prior to the date that the employee leaves. Any other funds left in the account will be returned to the employer upon the employee’s departure.

  6. Once an election has been made by an employee, those funds may not be refunded to the employee, revoked, or transferred to any other type of non-qualified commuter account. Elections can be changed monthly but employees should only elect what they know they will be able to use.

Prior to open enrollment, employers should make sure to provide employees with the necessary benefit information including:

  • How to sign up and make monthly elections or set recurring elections.

  • How much they can contribute monthly.

  • How much they can spend monthly.

  • The benefits of participating in the program.

  • The types of expenses that are covered.

  • How to use their benefit, get reimbursed for their expenses if applicable, and what type of substantiation is required.

  • Whether or not those expenses are reimbursed for tax-free.

  • What happens to unused contributions at the end of the employee’s employment at the company.

This information should be easily accessible for employees and offered through multiple mediums including landing pages, brochures, benefits presentations and more. Employers can ask their benefits brokers and third party administrators for help in crafting an effective and ongoing communications campaign for their commuter benefits plan.

What Expenses Are Eligible?

The types of expenses that are eligible for reimbursement through a commuter benefit plan will depend on the plan type. In this section, we will break out the types of expenses based on whether or not they’re able to be saved and reimbursed for tax-free. If the expense is not tax-exempt, employers can still offer a transportation stipend for which employees will owe income taxes on the reimbursed amount.

Commuter expenses that can be reimbursed tax-free:

  • Bus passes and fares

  • Ferry rides

  • Metro and subway passes and fares

  • Train fares

  • Parking near the office, employees’ work location where the employee provides services for the employer, or a mass transit center. This doesn’t include parking at or near employees’ homes. However, the IRS doesn’t specify exactly how far away the parking must be to qualify. 

  • Fees for using a commuter highway vehicle or Vanpool. This is a vehicle that seats at least six others in addition to the driver.

Commuter expenses which are subject to income tax when employees request reimbursement for them:

  • Carpooling 

  • Rideshare services like Uber or Lyft allowances

  • Mileage for a personal vehicle

  • Gas or fuel cards

  • Use of company car

  • Bike maintenance

  • Toll reimbursements

  • E-scooter, e-bike, e-moped rentals

  • Private corporate shuttle options

Where are Commuter Benefits Required?

For most employer-offered benefits, you would look to state or federal law to determine whether or not the employer is required to offer them. For example, all employers with 50 employees or more are federally mandated to offer health insurance, while California businesses with five or more employees are required to offer a retirement savings plan to their workforce.

Commuter benefits, however, can be mandated for employers on a local level. San Francisco, New Jersey, Los Angeles, Philadelphia, New York City, Washington D.C., Seattle, Richmond, CA and Berkeley, CA are the regions that require employers to offer transit benefits to their employees. 

San Francisco requires employers with a San Francisco location and 20 or more nationwide employees to offer said employees a commuter benefits plan. Businesses with 50 or more employees across the Bay Area are required to register for the Bay Area Commuter Benefits Program. Qualifying San Francisco businesses can choose to offer employees a pre-tax commuter benefit plan that reimburses for qualified tax-free expenses like transit passes, a taxable employer-paid benefit to reimburse for taxable transit costs like vanpools, or employer-provided transportation like employer-chartered buses.

New York City requires employers with a New York City location and 20 or more full-time, non-union employees to offer said full-time employees a commuter benefits plan that enables them to save tax-free money for qualified transportation expenses.

Washington, D.C. requires businesses with 20 or more employees located within the city to provide said employees with a commuter benefits plan. Employers have the option to offer a pre-tax commuter benefit plan into which employees save tax-deductible money to reimburse for qualified transit expenses, an employer-paid direct benefit for taxable reimbursements, or employer-provided transportation like a chartered bus.

Seattle requires businesses with 20 or more employees to provide said employees with a pre-tax commuter benefits plan through which they can save and reimburse for qualified transit expenses.

Richmond, CA requires businesses with 10 or more employees who work an average of 10 or more hours per week to provide said employees with one of the following: a pre-tax commuter benefits plan through which employees save and reimburse for qualified transit expenses, an employer-paid direct commuter benefit through which employees reimburse for taxable transit costs, an employer-provided transportation method like a chartered bus, or commuter benefits through the City of Richmond plan. Employers with 50 or more employees must register with the Bay Area Commuter Benefits Program.

Berkeley, CA-based employers with 10 or more employees must offer workers one of the following: a pre-tax commuter benefits plan through which they can save and reimburse for qualified transit expenses, an employer-paid direct benefit through which employees can reimburse for taxable transit costs, or an employer-provided transportation method like a shuttle. Employers with 50 or more employees must register with the Bay Area Commuter Benefits Program.

Los Angeles, CA-based employers with a total of 50 to 249 full and part-time employees at a single worksite must offer a commuter tax benefit to every full-time employee at that worksite - read the full bill. 

Philadelphia, PA-based employers with 50 or more employees must offer a mass transit program to covered employees, defined as anyone who worked an average of 30 or more hours per week within Philadelphia County for the same employer within the past 12 months. Full-time remote employees and government entities are exempt and employers are not required to provide a commuter benefit unless an employee requests one. Once requested, employers have 60 days to provide a commuter benefit. Employers can offer an employee-paid, pre-tax payroll deduction, or provide an employer-paid direct benefit such as a public transit key card or transportation shuttle.

New Jersey requires employers with more than 20 employees to offer a pre-tax transportation fringe benefit to employees who are not currently in a collective bargaining agreement.

Even if an employer isn’t located in one of these areas where commuter benefits are required, it can still be beneficial to the company and its employees to offer one of these types of plans. In the next section, we’ll detail what employees, employers, and brokers need to know about these types of benefits and how they can improve employees’ lives and the way the company functions.

For Employees

Participating in your employer’s commuter benefits plan isn’t just financially helpful, it can also improve your relationship to your workplace in general and ease the burden of returning to the office. But commuter benefits plans can vary in terms of the types of expenses for which they reimburse and how they function. So, before you sign up make sure that the expenses you incur for your commute are covered under your employer’s plan and that you’re comfortable paying any required income taxes on the benefit, if not a qualified commuter plan.

Tax savings

If your employer offers a commuter benefits plan that allows you to save pre-tax money to reimburse for transit costs, this could save you up to 37% on those costs, depending on your tax bracket. Even if you’re the average American, and pay 15% in income taxes, and you spend around $8,466 per year on your commute, you could save $1,270 just by saving for those transit expenses through a tax-advantaged commuter benefits account. 

How much can I contribute?

The IRS governs how much employees can save in their pre-tax commuter benefit accounts and adjusts this amount every year. For 2024, employees can contribute up to $315 per month to their account. You will have to choose how much you want to contribute each month and can change these elections on a monthly cadence. If your employer contributes to your account, their contribution is included in the $315 monthly limit.

Before you select the maximum contribution amount, you should educate yourself as to how your employer’s specific plan functions. You should understand the monthly spend limit on those accounts and what the plan policy is around unused account balances when you’re no longer an employee or the employer ends the benefit. There is no annual use-it-or-lose-it policy for pre-tax commuter benefits, so in most cases, your employer likely will let you roll over all of your unused balance at the end of the year. And they could give you a block of time after your employment with the company ends in which you can use your previously made contributions on any expenses incurred prior to your departure. But they might not choose to do so and any unused funds are unable to be transferred to another non-qualified commuter account or returned to you. 

Take this information, as well as how much you typically spend on your commute a month, into consideration when you choose how much you want to contribute to your pre-tax account. 

How do I ask my employer about these benefits?

If you’re unsure whether or not your employer offers this type of benefit, reach out to your HR department or the individual who handles the internal administration for your employee benefits. If your employer doesn’t offer commuter benefits but you would like them to, you’re not alone. In fact, 58% of millennials (the generation that represents the majority of the workforce) believes their employers should help pay for their commute. 

If you would like to lobby for your employer to offer this type of benefit, you could survey the other employees to see if they feel the same and if they do, give the survey results to your HR department. You could share the Newsweek survey results with your HR department and you could enlist the help of your higher-ups.

For Employers

The first thing employers need to know about commuter benefits is that employees are starting to expect them. Like we said in the section above, 58% of millennials (the generation that represents the majority of the workforce) believes their employers should help pay for their commute. Not only that, 87% of workers who worked at home during the pandemic want to continue to do so at least one day a week. So if you’re one of the companies that is committed to bringing workers back into the office five days a week, it might help that requirement be easier to swallow if you provide a benefit plan that helps them pay for it.

In addition to easing your employees’ transition back into the office, there are multiple other advantages to offering a commuter benefits plan.

Tax savings

If you choose to offer employees a pre-tax commuter benefits account through which they can reimburse for qualified commuting expenses, the company can save money. That’s because the employees’ taxable income will be reduced by the amount they contribute to the account. This reduction means the company pays less in federal unemployment taxes, as well as Social Security and Medicare taxes. 

Just keep in mind the following:

  • Employer contributions to the accounts are not a tax-deductible business expense.

  • In order to reimburse for the expenses tax-free, you must follow substantiation or terminal restriction rules specific to each type of benefit.

Other ways you save money

Clearly, commuter benefits are popular. They help ease the burden of employees coming into the office, which helps to boost employee morale while getting used to a new routine. This can lead to higher talent retention. The more employees you retain, the less money you spend on replacing not just them but their institutional knowledge. Higher morale and retention also leads to higher productivity.

Offering a popular benefit like this also helps improve the value of your benefits package to prospective employees without having to increase their compensation. 

How to offer commuter benefits to employees

To offer the most impactful plan to your employees, you must first know how they commute to work (or how they plan to commute) and what their pain points are as related to that commute. An effective way to get this information is to ask them. You can have HR send out a survey stating that your company is deciding how best to offer commuter benefits, and they’d like employees’ input on how they experience and pay for their commute currently.

Once you know the problems you’re trying to solve, you can reach out to a third party benefit administrator like Lively to put together your commuter benefits plan. You can choose the type of plan you want to offer (pre-tax or employer-funded and taxable, or both), what happens to the contributions when employees leave the company, how flexible you want the plan design to be, and more. Some third party benefit administrators even allow employers to offer employees an account-linked debit card.

One way that might ease internal benefit administration for your HR department is to choose a benefits administrator that offers a suite of benefits that you would like to offer like Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), Lifestyle Spending Accounts (LSAs), Medical Travel Accounts (MTAs), COBRA, Direct Bill, and more. That way you have all of your benefit solutions under one administrative roof.

Once you decide on the third party administrator and you configure your plan, you will offer employees the opportunity to participate in the benefit as soon as they are eligible. You will want to make sure you educate employees on plan specifics as well as how the plan will benefit them.

Once elections are made, you will process employee selections and communicate the necessary information to your payroll provider or your third party administrator if they, like Lively, work directly with your payroll provider to ensure the correct amounts are contributed from employees’ paychecks and allocated to the proper accounts.

For Brokers and Consultants

There’s a gap between what the majority of the workforce wants from their employer and what employers are currently offering. In addition, more employers want more from their employees in the form of coming back into the office (which is pretty unpopular). Requiring employees to come back to the office without offering some form of carrot for the effort could result in a culture problem of unhappy workers for the company. If workers are unhappy, they’re more likely to leave, which can exacerbate a culture and recruiting challenge for your clients. 

Your job as a benefits broker is to help your clients craft a benefits package that is both cost-effective and attractive to employees and help educate the client on any state-based requirements, effectively responding to their unique needs. A commuter benefits plan can help your clients meet their peoples’ real world needs. 

What are the benefits

The following are the ways a commuter benefits plan could be advantageous for a company:

  • It’s a popular benefit that could improve companies’ retention and recruitment efforts. In fact, 58% of millennials (the generation that represents the majority of the workforce) believes their employers should pay for their commute. 

  • By solving a real financial problem for employees (the average employee spends 19% of their income on their commute), employees are more likely to be satisfied with their job and their compensation package. 

  • Offering a pre-tax commuter benefit account can save employers money on the payroll taxes they owe including federal unemployment tax, Social Security taxes and Medicare taxes.

  • Offering a pre-tax commuter benefit account also allows employers to financially support their employees without increasing their compensation package and while saving money on payroll taxes.

  • This type of benefit provides an incentive for employees that are not enthusiastic about returning to the office.

  • A commuter benefit plan can help improve company culture by both encouraging more employees to come into the office at all, and to have a better attitude while they’re there. 

How to talk about commuter benefits with your clients

Brokers can refer to commuter benefits as being a cost-effective fringe benefit that can help improve company culture. Especially if the company is trying to encourage more employees to spend more time in the office. Commuter benefits, like Lifestyle Spending Accounts, can be used to promote company values like lowering their carbon footprint by riding their bike to work or taking public transportation. They’re a way that employers can show they care about their employees’ pain points, and they can support their employees financially without increasing overall compensation.

How to Set up Commuter Benefits

One of the easiest ways to set up a commuter benefits plan is to reach out to a third party benefits administrator like Lively. The benefits administrator can help the company design their plan in a way that meets their employees’ needs and is also cost-effective, both because it doesn’t require a large financial investment from the company in terms of compensation or account contributions, and because it shouldn’t result in a large increase in workload for the company’s HR department. 

Once your plan has been designed, you’ll want to connect your benefits administrator with your payroll provider so they can communicate and take the appropriate amount from each employee’s paycheck. You’ll want to make sure you communicate all of the details for how the account functions and its benefits to employees prior to, during and after open enrollment.

Get started with Lively

Lively offers a comprehensive suite of benefits accounts that can be used to craft a connected, well-designed and cross-functional benefits package that meets employee needs and business goals. Lively aids in both employer and employee onboarding and has award-winning customer service that ensures all parties get the most out of their benefits. By using one benefits administrator for your supplemental benefit needs, you get a cost-effective solution that scales with your company without increasing the HR workload.

Our commuter benefits are designed to meet the needs of the flexible, modern employee. They include tap-to-pay, mobile payment allocation, flexibility to pause or adjust contributions, and ability to add post-tax benefits that enable employers to cover “extra mile” expenses such as bike, scooter, and ride shares and meals at work.

If you’re ready to up-level your benefits package, reach out today! Lively is here to help.

Frequently Asked Questions

Are commuter benefits worth it?

By providing commuter benefits, employers can save money on federal unemployment, Social Security and Medicare taxes, as well as improve their recruitment and retention efforts as well as company culture.

By participating in commuter benefits, employees can save up 37% on their commuting costs (if they participate in a pre-tax commuter benefit plan). 

By including commuter benefits in their suite of offerings, brokers can help clients craft the most comprehensive and cost-effective benefits package possible while solving business goals.

The IRS does not impose an annual use-it-or-lose-it rule for commuter benefits, so typically the unspent amount will roll over month over month and year over year until the employee leaves the employer, retires, or is terminated.

Employees elect to participate in this plan and choose how much they want to contribute each month. The employer will then take the amount they selected out of their paycheck before income taxes are assessed, and deposit that money into their selected commuter benefit account. 

When an employee incurs a qualified expense, they either pay for it with a designated and restricted transit card, or pay for the expense out of pocket and seek reimbursement later, depending on plan design. Typically for parking expenses, employees pay for it first, collect the required documentation (usually a receipt), then submit that documentation to their benefits administrator. Once approved, the benefits administrator will reimburse the employee in the manner the employee has elected (either a mailed check or a direct deposit into their account). All plans are a little different so it’s important to confirm your exact plan design with your commuter administrator or employer. 

Pre-tax commuter benefit plans do not cover gas expenses for employees’ personal vehicles. But employers can choose to offer employees fuel cards or reimburse for gas expenses through a taxable commuter benefits plan.

No. But if the employee leaves the company, the company can allow a certain block of time during which the employee can use up any remaining contributions on qualified expenses that were incurred through the employee’s termination date.