Setting Up a Commuter Benefits Plan for a Small Business
Commuter benefits – an employer-provided method for employees to pay bus fare, parking and other transit expenses using pre-tax dollars – are a win-win-win: employees save money, employers have a benefit to advertise on job listings, and the environment benefits from fewer cars on the road. But are commuter benefits worthwhile for a resource-constrained startup? We’ll show you how to get commuter benefits at your company, and help you decide if you should offer this or other perks.
How do commuter benefits work?
Broadly speaking, commuter benefits allow employees to pay for many transit expenses with pre-tax dollars, saving up to 40% on those expenses. Typically, those expenses include:
- Public transit to and from work (including public transit tokens, monthly passes and vouchers)
- Vanpools or other qualified, privately owned transportation services
- Parking near your office or at a location from which you commute (like a train station)
Depending on your location and program, qualified expenses may include:
- Biking costs, like repairs, storage, and equipment purchases
- Lyft Line and UberPool fares
Commuter benefits usually don’t cover:
- Residential parking
- Gas, tolls, mileage, or other costs of driving your own car
- Parking at places where you stop on our way to work
- Business trips and other expenses that the employer pays for
Though employers are the ones who offer and administer commuter benefits, employees decide how much money they want put into the program every month. That amount is then deducted from their paychecks into a commuter benefit account (which can be administered by the employers themselves or outsourced HR benefits providers).
Employees can contribute pre-tax dollars up to a set limit (in 2017, that’s $255 each for parking and public transit). After that, they can still contribute to a commuter account, but they’ll have to use post-tax dollars. Employers can also make a direct contribution to employees’ commuter accounts, but those funds count against the $255 limit.
Employees can enroll or change their contribution amount at any time, but depending on the program, those changes may not go into effect until the next month. Unused funds roll over from month to month, but if an employee leaves the company, the remaining account balance is returned to the employer.
Generally speaking, though, commuter benefits are a way for employees to save money on public transit and parking, with minimal cost to the employer.
What are the tax implications?
Relative to, say, a bonus of the same amount, commuter benefits offer tax advantages to both employer and employee. They’re considered tax-free transportation fringe benefits, and aren’t subject to employer payroll or employee income taxes. Let’s say you pay around 8% in payroll taxes and your employees pay around 30% in income taxes. $3,060 in commuter benefits (12 months of the monthly maximum for public transit) amounts to $3,060 in your employees’ wallet, since it’s pre-tax. That same amount in the form of a bonus would cost you $245 and your employee $918, lowering the net amount to $1,897. From both an employer and employee perspective, commuter benefits save tax dollars.
What are the costs of a commuter program?
Typically, commuter benefits programs are free for employees but often carry a small charge for employers if they’re administered by a third party. Depending on your size and benefits provider, that charge may vary, but you may be able to find a program for as low as $5 per employee. Zenefits, for example, has a no-annual-contract plan, for example, that charges $5 a month per employee with a minimum of five employees. Obviously, any amount that you contribute to employees’ commuter benefit accounts will add to the cost, but those funds won’t be subject to payroll taxes.
Legally required commuter benefits: San Francisco Bay Area; Washington, DC; New York City
Well, in some cases you have to offer commuter benefits: the city of San Francisco; Berkeley, CA; Richmond, CA; Washington D.C.; New York City; and the San Francisco Bay Area require employers to offer some kind of transit program. This may include the traditional commuter benefits program we’ve described, an employer-provided commuter subsidy, or an employer-provided shuttle service. If you’re a small company, chances are the first option is the most cost-effective for you.
Should I offer commuter benefits or another perk?
If you’re not located in one of the cities and areas listed above and therefore not legally mandated to do so, how can you decide whether commuter benefits are worth it?
A major consideration is the type of transit in your business’s metro area. Commuter benefits come in handy in densely populated metro areas, where biking and public transit options are plentiful and parking can be expensive. However, if your office is in the suburbs and free parking is readily available, transit commuter benefits may go to waste. The program only makes sense if your employees are spending money on biking, public transit, parking, or vanpools.
Beyond that, how do you weigh commuter benefits against, say, salary increases or a retirement program? As we mentioned before, commuter benefits are more tax-advantaged than bonuses or salary bumps for both employer and employee. When you’re comparing tax-advantaged programs, things get a little more complicated.v
Simply offering commuter benefits (without contributing funds) can cost employers around $5 per employee per month. Human Interest’s 401(k) costs employers $120 plus $4 per employee each month (a one-time $499 setup fee may apply). However, employers enjoy tax incentives to offer 401(k) programs: the Credit for Small Employer Pension Plan Startup Costs offers small businesses a tax credit of 50% of setup costs, up to $500 a year for three years. You can also claim tax deductions for ongoing expenses.
If you’re deciding between retirement programs and commuter benefits, the glib answer is to recommend providing both – especially since both are tax-advantaged relative to salary increases. And since commuter benefits are relatively inexpensive to administer, it’s a good option to retain existing employees while attracting new talent.
That said, if you want to contribute to either your employees’ commuter or retirement accounts, a 401(k) match might be the way to go. While both offer tax benefits, a 401(k) contribution pays huge dividends long-term (and you can deduct those contributions). A $1,200 annual contribution to a 25-year-old’s 401(k) can grow to over $26,000 when she retires at 65, assuming an 8% annual return. That same amount – $100 into a commuter benefits account every month – will be spent and never seen again. If it’s in your budget, matching 401(k) contributions provide more bang for your buck (pun absolutely intended).
How to set up commuter benefits for your employees
There are a number of third-party services that help small businesses administer commuter benefits, such as WageWorks, Zenefits, Commuter Benefit Solutions, and Navia. If you don’t already have an outsourced HR benefits administrator, you can shop around for the lowest-cost program for your business.
From there, the provider will guide you through setting up the program and educating your employees. It will be on your employees to enroll in and set contribution levels for their benefit accounts, though you will probably have to onboard new employees onto the program.
Commuter benefits are a tax-advantaged way to save you and your employees money while helping the environment. If you can offer this perk, your balance sheet, your team’s wallets, and everyone who breathes will thank you.
Image credit: Luis Llerena
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