What Is a Commuter Benefit Plan & How Does It Work?
Learn how commuter benefit plans work to help employees save on travel expenses and benefit employers.
Commuter benefit plans are employer-sponsored programs that allow individuals to set aside a portion of their earnings for eligible commuting expenses. By participating, employees can reduce their out-of-pocket spending on travel, increasing their disposable income. This eases the financial burden associated with daily commutes, making it a valuable offering.
Core Components of Commuter Benefit Plans
A commuter benefit plan is a qualified transportation fringe benefit, as defined by Internal Revenue Code Section 132. It allows employees to pay for work-related commuting expenses with pre-tax dollars. This reduces their taxable income, including federal income tax, Social Security, and Medicare taxes.
These plans cover qualified transportation benefits. This includes transit passes for public transportation (buses, subways, trains, and ferries). It also covers transportation in a commuter highway vehicle, known as vanpooling, where the vehicle seats at least six adults (excluding the driver) and is primarily used for commuting. Qualified parking expenses are also included.
The tax advantages extend to both employees and employers. Employees benefit from reduced taxable income and overall tax liability. Employers offering these plans can realize payroll tax savings, specifically on FICA taxes, as pre-tax contributions reduce total wages subject to these taxes.
How Commuter Benefits Work for Employees
Employees typically enroll in a commuter benefit plan through their employer, often during an open enrollment period or upon starting employment. Once enrolled, employees elect a monthly contribution amount to be deducted from their gross pay. These deductions are made on a pre-tax basis, meaning the money is set aside before federal income tax, Social Security, and Medicare taxes are withheld.
For 2025, employees can contribute up to $325 per month for qualified transit passes and vanpooling expenses. A separate monthly limit of $325 also applies to qualified parking expenses. These limits are set by the IRS and are subject to annual adjustments.
Employees access their funds through various methods, such as benefit debit cards, vouchers, or direct reimbursement for out-of-pocket expenses. A benefit card can be used directly to purchase transit passes or pay for parking. Unused pre-tax contributions roll over from month to month, allowing employees to accumulate funds for future commuting needs.
Considerations for Employers
Employers may choose to offer commuter benefit plans for several reasons, including enhancing employee recruitment and retention efforts. Providing these benefits can improve employee morale and demonstrate a commitment to supporting their workforce. Beyond employee satisfaction, employers can realize direct financial advantages through payroll tax savings, such as the employer portion of FICA taxes.
While there is no federal mandate requiring employers to offer these plans, some local ordinances in specific areas do make it compulsory for businesses meeting certain criteria. For instance, some metropolitan areas require employers of a certain size to provide the opportunity for pre-tax commuter benefits. These local requirements mean employers must be aware of and comply with regional regulations.
Administering a commuter benefit plan involves several responsibilities for employers. This includes setting up the plan, accurately managing the pre-tax payroll deductions for participating employees, and ensuring compliance with IRS regulations. Many employers opt to partner with third-party administrators to handle the complexities of plan management, including processing contributions, distributing funds, and maintaining records.