Yesterday’s action in the United States Senate would restore parity under federal tax law treatment for fringe benefits designed to encourage the use of public transportation by employees.
Under Section 132(f) of the Internal Revenue Code (the “Code”), employer-provided qualified transportation fringe benefits (“QTFs”) that do not exceed specified monthly excludable limits are exempt from withholding and from the payment of employment taxes. QTFs are not reported as taxable wages on an employee’s Form W-2 and are not included in gross income. The income exclusion for QTFs is available only for employees. The allowable forms of QTFs include (a) transportation in a commuter highway vehicle in connected with travel back and forth to work; (b) transit passes; (c) qualified parking expenses; and (d) qualified bicycle commuting reimbursements. Some substantiation requirements may apply.
Code Section 132(f) sets dollar limits for the level of QTFs that can be provided on an excludable basis. Historically, a higher level of exclusion was available for qualified parking expenses than was available for expenses related to eligible transportation in a commuter highway vehicle and transit passes. However, the American Recovery and Reinvestment Tax Act of 2009 increased the amount of the tax exclusion applicable to these latter expenses so that the monthly limitation for transportation in a commuter highway vehicle and for transit passes (taken in the aggregate) would be the same as the amount of the exclusion for qualified parking expenses. This increase was only temporary, and (after a second legislative extension) it expired at the end of 2011. Accordingly, and without congressional action, for taxable years beginning in 2012 and beyond the monthly exclusion for the aggregate amount of expenses for transportation in a commuter highway vehicle and transit passes will be $125 and the monthly exclusion for qualified parking expenses will be $240 (both limits are subject to cost of living adjustments).
Advocates for commuter transportation systems have argued that there is no justification for treating employees who drive to work better than those who use public transportation. This argument seems especially compelling in these days of increasing gas prices. These advocates have been seeking a return to the parity that existed in 2011 and before.
It seems that this argument has been heard and accepted in Congress —or at least in the Senate. On March 14, 2012, the Senate passed the Surface Transportation Reauthorization legislation in a very rare bipartisan 74-22 vote. Among a range of matters, this legislation would restore for 2012 the parity between the exclusion for qualified parking expenses and the aggregate exclusion for eligible transportation in a commuter highway vehicle and transit passes. The provision includes a retroactive extension of the parity provision back to January 1, 2012. Thus, both exclusions would be set at the $240 per month level.
The Senate bill also contains a potentially more controversial pension funding interest rate reform provision designed to ease the impact on required levels of pension contributions of today’s historically low interest rates. This change would have the short term effect of lowering required levels of pension plan contributions by sponsoring companies and therefore lowering the related levels of deductions related to those contributions. This in turn allows the Senate to score this provision as an all important revenue raiser and thus as an offset to the costs of the larger transportation bill. Some question whether potentially deferring the funding of accrued pension liabilities to a later time reflects proper policy at this time, and therefore this provision could face some challenge.
Consideration of this bill, or something like it, now moves to the House of Representatives. Some believe passage in the Senate will increase pressure on the House to act on this important piece of legislation (perhaps especially due to the bi-partisan nature of the vote in the Senate), but passage in the House remains uncertain and certainly will not happen too quickly (in fact, the House is not even in session this week). Besides the normal tension between House Republicans and Democrats, there seems to be considerable disagreement on approach within the Republican majority. In an effort to get this issue settled at least for now, Speaker of the House John Boehner apparently is willing to bring the Senate version to the House floor for consideration although it remains unclear whether he has adequate support within his own party. Efforts (perhaps inevitable) to introduce amendments to the bill in the House would just add another level of complexity to passage (and observers caution that some House members will not support the pension funding provision mentioned above). This author cannot predict an outcome–both as to timing and as to content. In fact, larger issues are at stake than the QTFs issue (such as the federal government’s ability to impose and collect about $110 million a day in federal gasoline and diesel taxes that expires at the end of March), but the well intended parity issue will hang in the balance pending action in the House. Those employers interested in the adjustments of the QTFs exclusion for expenses for transportation in a commuter highway vehicle and transit passes should keep their eyes on the House.