The IRS has released Revenue Procedure 2021-45, which includes cost-of-living adjustments for employee qualified transportation fringe benefits for the 2022 taxable year, along with annually adjusted numbers for 2022 for other tax provisions. The combined monthly limit for transportation in a commuter highway vehicle and a transit pass will increase to $280 in 2022, up from the 2021 limit of $270. The monthly limit in 2022 for qualified parking will also increase to $280 from $270.
What Is a Section 132 Plan?
A Section 132 is a transportation plan (Internal Revenue Code Section 132(f)) that allows employees to set a pretax amount each paycheck to use during the benefit year to pay or be reimbursed for work-related transit and parking expenses including transit passes and transportation in certain commuter highway vehicles (e.g., qualifying van pools). Transportation benefits include the costs that employees might incur in their regular commutes to and from work.
Section 132 plans have monthly dollar limits that are set by IRS law, and any amount reimbursed over those statutory amounts must be included in the employee’s taxable income. The monthly dollar amount is based on the cost-of-living adjustments announced by the IRS before the beginning of each calendar year. Both employee pre-tax salary deferrals and employer-paid benefits, if any, count toward the maximum amount. Employees may carry over unused amounts each year, but unused funds cannot be refunded.
Unlike health and welfare plans, employers are not required to have a written program document, but it is recommended that employers put the specifics of their program in writing. Additionally, employers cannot take a tax deduction for providing the benefits.
Next Steps for Employers
Under federal law, employers are not required to offer transportation benefits; however, certain states and localities including but not limited to, the District of Columbia, Berkley, CA, Los Angeles, CA, San Francisco Bay Area, New Jersey, New York City and Seattle, WA do require employers with a certain number of employees to offer transportation plans to employees. Employers in these locations should familiarize them the requirements in their location and consider how they want to administer these benefits, whether in-house or using a third-party administrator.
Even where not required by state or local law, transportation benefits are particularly appealing for workers who live and work in locations with mass transit systems, and employers may wish to consider offering commuter benefits to ensure that their benefits package is competitive which may assist with retention and recruitment.