FSA Transit Benefits: Eligible Expenses, Limits, and Key Rules

Flexible Spending Accounts (FSAs) for transit benefits allow employees to save on commuting costs using pre-tax dollars. These accounts are particularly useful in urban areas with prevalent public transportation, enabling individuals to allocate funds for work-related travel expenses.

Eligible Commuting Expenses

Eligible commuting expenses under FSA transit benefits must directly relate to traveling to and from work, as specified by the IRS. Covered expenses include public transportation fares for buses, trains, and subways, encompassing single-ride tickets and monthly passes.

Parking expenses may also qualify if incurred at or near the workplace or a public transportation hub. For example, parking fees at a train station before commuting to work may be eligible, but parking near an employee’s residence does not qualify.

Bicycle commuting expenses, while less common, are also covered. The IRS permits reimbursement for bicycle maintenance, storage, and purchase costs, provided the bicycle is used for commuting. This supports environmentally friendly travel options.

Contribution Requirements

For 2024, the IRS has set the monthly pre-tax contribution limit for transit benefits at $300, applicable separately to both transit and parking benefits. Contributions are deducted from an employee’s paycheck pre-tax, lowering taxable income and offering savings.

Employers are responsible for establishing FSA accounts and ensuring compliance with IRS regulations. They must inform employees about enrollment periods and contribution limits. Employees should assess their commuting expenses carefully to avoid over-contributing, as excess funds cannot be refunded or rolled over to the next year.

Under the “use-it-or-lose-it” rule, unused funds are forfeited at the plan year’s end unless the employer offers a grace period of up to two and a half months or allows a carryover of up to $610 to the following year.

Midyear Allocation Changes

Midyear adjustments to FSA transit allocations may be necessary due to changes in commuting patterns or costs. The IRS allows adjustments for specific circumstances, such as a change in employment status, relocation, or shifts in commuting expenses. For instance, transitioning from remote work to daily office commuting may require recalibrating allocations.

Employees must initiate and document qualifying events to revise contributions. Employers typically provide a window for these changes, emphasizing the importance of timely action. Regularly reviewing commuting expenses helps prevent financial inefficiencies, such as overestimating costs and forfeiting unused funds or underestimating and incurring out-of-pocket expenses.

Claim Submission Process

Submitting claims for FSA transit benefits requires proper documentation and adherence to deadlines. Employees must keep receipts or similar records of commuting expenses, such as digital receipts for transit passes or parking fee stubs.

Employers usually offer a platform for claim submissions, enabling employees to upload receipts and track claims digitally. Missing submission deadlines may result in forfeiture of reimbursements, so employees should stay mindful of employer-set timelines.

Balances and Forfeitures

To avoid forfeiting unused funds, employees need to manage their FSA transit benefit balances carefully. The “use-it-or-lose-it” rule means remaining balances are forfeited at the plan year’s end unless an employer provides accommodations like a grace period or limited carryover.

Employees should periodically review account balances and adjust future contributions if necessary. For instance, reducing contributions midyear can prevent surplus funds, while increasing contributions ensures sufficient coverage for rising expenses. Employers can assist by providing tools like balance trackers within benefits portals.

Tax Implications

FSA transit benefits offer significant tax advantages. Contributions are made pre-tax, reducing taxable income and leading to savings on federal income tax, Social Security tax, and Medicare tax. For example, an employee in the 22% federal income tax bracket who contributes the maximum $300 monthly could save approximately $1,188 annually in combined taxes. Employers also benefit, as these contributions are exempt from payroll taxes, potentially lowering their tax liability.

However, only eligible commuting expenses under IRS guidelines qualify for tax exemptions. Using FSA funds for non-eligible expenses may result in those amounts being considered taxable income, potentially incurring penalties. While FSA transit benefits reduce taxable income, they do not affect eligibility for other tax credits like the Earned Income Tax Credit (EITC). Consulting a tax professional can help employees understand how these benefits fit into their broader financial strategies.