On June 8, 1998, the Transportation Equity Act for the 21st Century (TEA-21) was signed into law. It made several changes to the Internal Revenue Code (IRC), including a provision found in Section 9010 affecting the transit and vanpool benefits which are considered qualified transportation fringe benefits under 26 USC 132(f).

The flexible benefit options afforded by TEA-21 and the Taxpayer Relief Act of 1997 have been dubbed "Commuter Choice" programs. As part of a "Commuter Choice" program, an employer may . . .

1. Offer a Tax-Free Transportation Allowance to Employees who Commute by Transit or Vanpool.

   Employees choose to set aside up to $100.00 per month ($1,200 per year) of pre-tax income to pay for transit or vanpooling. Employers save money overall since the amount set aside is not subject to payroll taxes. Employees also realize savings, since the amount of an employee's salary set aside for transportation benefits is not subject to income tax. Also, the funds set aside are not subject to employee and employer portions of FICA and Medicare taxes.

2. Offer a Tax-free Transportation Benefit to Employees who Commute by Transit or Vanpool.

   The employer pays their employees to commute by transit or vanpool, up to a limit of $100.00 per month. With this arrangement, employees get up to $100.00 per month ($1,200 per year) in a tax-free transportation benefit. This $1,200 annual benefit is considered non-taxable income to the employee and is also exempt from payroll taxes. The employer treats the payments as regular business expenses, similar to medical insurance premiums.

3. Offer a Matching Allowance/Benefit Program to Employees who Commute by Transit or Vanpool.

   Employees could elect a pretax deduction of $75.00 from their gross pay and the employer could contribute a company-paid transportation pass worth $25.00. The total would equal the maximum tax-free limit of $100.00. The employee could not deduct $100.00 pretax in addition to his or her employer contributing a pass without the pass being subject to payroll and income taxes. The "matching" program provides each employee the opportunity to realize the maximum $100.00 pretax monthly transportation benefit.

4. Allow Employees to "Cash-out" their Parking Benefit.

   Parking cash-out refers to a commuter benefit that offers employees the option to accept taxable cash income, up to $185.00 per month, in exchange for his or her free or subsidized parking space at work. This benefit gives the employee the choice of how to use the money, for parking or for a tax-free transit or vanpool pass, or accept the balance of the cash-out in taxable cash. Free or subsidized parking makes it easier for employees to drive alone instead of considering other options. If employees are given the cash instead of the parking, they may think twice about how to use that money.