Changes to Employer Provided Transportation Benefits

by Greg Yoder

One of the many provisions in the new tax law is a disallowance of any deduction for certain employer-provided transportation benefits, including employee parking.

Under the old law, provided certain requirements were met, if an employer paid for an employee’s parking, the employee would not have to report any income for the benefit, and the employer would get a deduction for the amount paid.

Under the new law, employees can still exclude the income for these “qualified transportation fringes,” but employers can no longer take a deduction. This provision means that employers face the choice of either (a) not providing the benefit, or (b) paying more for it. The disallowance affects even non-profit employers: the new law makes any amounts paid for employer-provided parking (and other excludable transportation benefits) subject to Unrelated Business Income Tax (UBIT).

Some commentators who are knowledgeable in the area of benefits taxation have suggested that there may be a workaround to this problem. They believe that putting parking benefits inside a salary reduction arrangement (SRA) may maintain both the employee exclusion and the employer deduction.

An SRA works by offering the employee the choice between the actual receipt of compensation and the provision of a benefit. In this case, for example, assume that an employer has an employee who, in 2017, received monthly compensation of $5,000. In addition, the employer paid $150 each month for the employee’s parking. In 2018, to put the employee in the same position and implement a salary reduction agreement, the employer would increase the monthly compensation to $5,150. The employee could either receive the entire $5,150 (less the other normal withholding amounts, such as employment and income taxes) or could reduce her salary to $5,000 and take the employer-provided parking benefit on a pre-tax basis, much like a 401k deferral.

The theory here is that by moving the parking benefit to an SRA, the $150 paid by the employer for parking effectively becomes deductible compensation, rather than a nondeductible benefit.

It’s not clear to us that this approach works. The new law added provisions to make employer-provided parking nondeductible, but it also left in place the old provision that allowed parking to be provided under an SRA. We hope that there will be additional guidance from IRS resolving the issue.

Regardless, many employers will find it difficult to stop paying for their employees’ parking, and if the SRA approach does work, then implementing an SRA will reduce the employer’s tax burden. Additionally, a parking SRA is neither expensive nor difficult to implement. An employer who feels compelled to provide parking for its employees has little to lose by implementing an SRA.

Technical Requirements

In order to provide parking under an SRA, IRS regulations have a number of requirements. We’ve attached a sample election, but any format is acceptable provided it meets IRS requirements:

  1. The election needs to be in writing. “Writing” in this case also includes electronic formats, subject to additional requirements. The election has to include:
    • a. The date of the election
      b. The amount of the compensation to be reduced
      c. The period for which the benefit will be provided
  2. The election can be automatic. In other words, an employer can provide that the benefit will be deemed to have been elected unless the employee affirmatively elects to receive the cash compensation instead. In order to make the election automatic, you must provide employees with adequate notice that there will be a compensation reduction, as well as adequate opportunity to choose the cash compensation instead.
  3. The monthly benefit can’t exceed the statutory amount. This amount changes each year and is $260 per month in 2018. Any excess over this amount will be taxable to the employee and nondeductible to the employer.
  4. The election must be made before either the benefit or additional compensation can be provided. In other words, if you already paid for January 2018 parking in January, the election won’t be effective until February.
  5. The election can’t be revoked once it’s made for a given period if that period has started. As an example, if an employee elects in January 2018 to receive the parking benefit beginning in February 2018, the employee can still revoke the election until the end of January. But once February starts, and the employee is eligible to use the parking benefit, a February revocation wouldn’t be effective until March. Similarly, if the same employee continues to receive the benefit until, say, September, a revocation in September would be effective in October.

If you have any questions regarding this matter, we’d love to discuss them with you.