Transit and parking benefit plans, commonly known as commuter benefits, allow employees to use pre-tax dollars to cover certain commuting expenses. Governed by IRS Section 132(f), these plans offer tax savings for both employees and employers and can be a valuable part of a competitive benefits package. This article explains how these plans work, what happens to unused balances, and where they’re legally required.
How Transit and Parking Plans Work
Employees can elect to withhold part of their wages on a pre-tax basis to cover qualified expenses such as public transit passes, vanpooling costs, and parking near the workplace or a transit hub. Vanpool vehicles must seat at least six adults and be primarily used for commuting.
In 2025, the IRS monthly limit is $315 for transit expenses and $315 for parking expenses. These are separate limits, and employees can use both in the same month if eligible.
Funds are usually deducted through payroll and applied to a commuter benefits debit card or reimbursed through a claim process, more common for parking expenses than transit.
What Employers Should Consider
Offering a transit and parking plan requires thoughtful planning and ongoing management. Key considerations include:
- Eligibility and Participation: Employers can define who is eligible which is typically all regular employees. Temporary or part-time workers may be excluded.
- Tax Advantages: Contributions are exempt from federal income tax, Social Security, and Medicare taxes. Employers also save on FICA taxes.
- Rollover of Funds: Unused balances generally roll over month to month while the employee is active. There is no annual use-it-or-lose-it rule, unlike with FSAs.
- Reimbursement Procedures: If employees pay out of pocket, employers must have a compliant reimbursement process with appropriate documentation.
- Flexible Contributions: Employees may start, stop, or change their contributions monthly. This flexibility makes these plans adaptable to changing commute needs.
- Regional Mandates: Some jurisdictions require commuter benefits for employers of a certain size. Employers should confirm compliance based on location.
- Remote and Hybrid Work: Changing commuting patterns may impact participation. HR may need to adjust communication or program offerings.
- Administration and Documentation: A written policy, while not required by the IRS, supports consistent administration. Many employers rely on third-party vendors to manage compliance, cards, and reporting.
What Happens to Unused Balances
Unused balances roll over month to month while the employee remains employed and eligible. However, these funds are not refundable or transferable. IRS rules prohibit returning unused funds to employees, even if they were not used due to remote work or over-contribution. Upon termination, any unused balance is typically forfeited unless the employer allows a brief claims window for eligible parking expenses. Funds can only be used for qualified commuting expenses incurred while employed and participating in the plan.
Where Commuter Benefits Are Required
While commuter benefits are optional in many areas, several cities and states mandate them. Jurisdictions with requirements include:
- New Jersey: Employers with 20 or more employees statewide.
- New York City: Employers with 20 or more full-time, non-union employees.
- Washington, D.C.: Employers with 20 or more employees must offer either pre-tax benefits, an employer-paid subsidy, or company-provided transportation.
- Philadelphia, PA: Employers with 50 or more employees.
- Chicago, IL (RTA region): Employers with 50 or more full-time employees near fixed-route transit.
- Seattle, WA: Employers with 20 or more employees worldwide.
- San Francisco Bay Area: Employers with 50 or more full-time employees.
- Berkeley and Richmond, CA: Employers with 10 or more employees.
For employers operating across multiple jurisdictions, monitoring these mandates and adjusting plan offerings accordingly is critical to staying compliant and avoiding penalties.
Best Practices for HR
To administer commuter benefits effectively and compliantly, HR should:
- Clearly communicate eligibility, enrollment steps, and contribution limits to employees.
- Review local ordinances regularly and confirm whether benefits are required in each work location.
- Coordinate with payroll and third-party vendors to ensure accurate deductions and reporting.
- Address forfeiture of unused balances in termination procedures and employee exit materials.
- Monitor participation trends and be ready to adapt offerings for remote, hybrid, or returning-to-office scenarios.
- Document policies and processes for consistent and auditable administration.
With proper oversight, commuter benefit plans can enhance employee satisfaction, support environmental goals, and deliver tax savings.
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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.
