“Back in the day,” meaning “when I was in college,” Paul Simon (of Simon & Garfunkel fame) advised us to “hop on the bus, Gus.” Turns out that, by installing a Qualified Transportation Expense Plan (QTEP), employers can enable their employees to save up to 40% on out-of-pocket expenses on certain transit and parking costs.
Many of us are familiar with Section 125 plans, which make it possible to pay for health insurance premiums (and some other expenses) on a pre-tax basis. A lot of folks don’t know, though, that some transportation expenses are also tax qualified. No, one can’t just deduct that subway token on next year’s 1040EZ, but “(q)ualified transportation benefits can be provided directly by you or through a bona fide reimbursement arrangement.”
Under a QTEP, such expenses (which must associated with one’s commute to and from work) can be paid with pre-tax dollars. You’re most likely to find them used in major cities by commuters who take mass transit, but they’re also available to workers who use carpools.
In a survey last year, the Society for Human Resource Management found that 14% of employers offered a QTEP (or other transit subsidy). That’s about 1 out of every 7 companies: not bad for a benefit that’s been so long under the radar. If (when?) gas prices start to climb again, perhaps that number will increase.
There are, of course, rules and guidelines for companies that want to go this route (pun in 10 did). For one thing, QTEP’s can’t be offered under an aforementioned Section 125 (i.e. “cafeteria”) plan; that’s because they’re enabled under Section 132, which has its own rules:
1) There are monthly dollar limits, any reimbursements that go over these limits become taxable income to the employee
2) There are special rules about how (and when) benefits are calculated
3) It’s not really “use it or lose it,” because unused funds can be rolled over. They can’t, however, be cashed out.
4) Employees can “join up” any time during the year, not just at Open Enrollment
And just what kind of expenses qualify? Well, it’s not just about Dagwood’s carpool: to be eligible, the vehicle in question must seat at least 7 adults (including the driver). Plus, at least 80% of the vehicle mileage must be expected to be for transporting employees between their homes and work.
But what if you’re not in a carpool? Don’t despair: transit passes (for buses, trains, and subways) also count. Or, if you still have to drive solo, your parking pass could also qualify. Pretty sweet.
So why haven’t we heard more about these plans? I have my suspicions: first, they’re not as well known (or as aggressively marketed) as their Section 125 “cousins. And second, until recently, there hasn’t been such a hue and cry over gas prices. If they continue to hover in the $3/gallon range, though, don’t be surprised to see more airplay given to QTEP’s.
Henry Stern, LUTCF is an independent insurance agent in Dayton, OH. A licensed Continuing Education instructor for Ohio and Kentucky, he has well over 20 years of experience in “the biz.” He blogs every day (or so it seems) at InsureBlog.
In this week's column, now up at The Medical Blog Network, we revisit (and update) Qualified Transportation Expense Plans. Want a tax break for your commuting expenses? This little gem could be just the ticket.