A new tax provision could encourage many employers to introduce mass transit subsidies into their benefits programs. Under prior law, employers were required to offer benefits in addition to compensation, thus increasing their total costs. Under the new law, employers and employees could negotiate compensation packages to include mass transit benefits in place of compensation, thus reducing their total costs. Reducing costs appeals to employers, while employees welcome tax benefits from their daily commute. The employer pays for the benefit and receives an equivalent deduction from his or her business income taxes.
Employees receive the benefit completely free of all payroll and income taxes.
Employers may permit employees to set aside some of their pretax income to pay for transit or eligible vanpools. Employers do not pay for the benefit, but permit employees to use some of their gross income to pay for commuting expenses prior to tax calculations. This fringe benefit is similar to the pretax flexible spending accounts available for medical and dependent care expenses. Separate reimbursement accounts are maintained for each category. Any amounts remaining in the employee's reimbursement accounts at the end of the year are refunded to the employee in the following calendar year and are then taxable compensation.