Employer-Based Commuter Benefits Programs: How they Work and their Impacts February 9, 2017 Michael Grant ICF

Purpose / Overview Understanding types of commuter benefits programs What they are, how they work Benefits for employers, employees, and society

Types of Financial Incentives Commuter benefits programs Transit benefits Vanpool benefits Bicycle benefits Parking cash out and parking-related benefits Other supporting incentives and infrastructure (e.g., guaranteed ride home, prizes, rideshare rewards)

What are Commuter Benefits? A type of qualified transportation fringe benefit Part of the federal tax code: Title 26 USC Section 132(f) Tax-free (no federal payroll or income taxes) up to specified limits Terminology Although various agencies and employers interpret these terms in different ways, for the purposes of this class we are using the definitions provided above. Commuter benefits are employer-based transit and vanpool benefit programs. The tax code defines three types of qualified transportation fringe benefits: transit, vanpool, and qualified parking. The term “qualified transportation fringe benefits” will be further discussed in Lesson 4. Commuter Choice (a term service marked by the Environmental Protection Agency and the Department of Transportation) refers to all types of employer incentives to encourage employees not to drive alone. These incentives may include: Carpooling/vanpooling incentives, Bicycle/pedestrian incentives, Commuter awards, Telework/compressed work week, and Parking cash out. Version I

How do Commuter Benefits Work? Requires employer involvement Employers elect to provide benefits through: Employer-paid program: A tax-free benefit of transit and vanpool fares, Employee pre-tax program: Employees reserve income on a pre-tax basis to pay for transit or vanpool costs or Combination of the above The legal non-taxable limit on transit/vanpool benefits is $255 per month in 2017 How Commuter Benefits Work All options (employer-paid, employee-paid, or combination) require the employer’s involvement because Congress intended this to be a benefit plan to promote the use of transit for commuting. In an employer-paid plan, the employer pays for employees’ transit or vanpool passes, vouchers, or fares. In an employee pre-tax plan, the employer allows employees to use pre-tax money to pay for transit or vanpool expenses. In a combination plan (sometimes referred to as a cost-sharing plan), the employer pays a portion of the transit/vanpool cost, and the employee pays the remainder. The benefit has evolved over time. Employers have been able to offer employer-paid transit and vanpool benefits as a qualified transportation fringe benefit since 1992. The provision that allows employers to offer employees an employee-paid pre-tax deduction to pay for transit or vanpool costs was included in the TEA-21 legislation. The Transportation Equity Act for the 21st Century (TEA-21), enacted in 1998, amended Section 132(f) of the Internal Revenue Code. It allowed any qualified transportation fringe to be provided to employees in lieu of salary. TEA-21 also raised the tax-free limit on transit and vanpool benefits from $65 to $100 per month, starting in 2002. Version I

Transit and Vanpool Benefits Function in similar ways Employer can pay for the cost of transit passes or vanpool fares tax-free Employer can allow employees to have the amount taken from their pay pre-tax Employer and employee can each pay a portion of the cost Combined limit for transit/vanpools is $255/month in 2017 May be combined with parking benefit

Bicycle Commuting Reimbursement Benefits Employees can be reimbursed up to $20/month for biking to work Helps to cover bike repair and storage costs Cannot be combined with other qualified transportation fringe benefits Cannot be implemented by taking money from employee’s pay on a pre-tax basis Applies for months in which the employee regularly uses a bicycle for a substantial portion of travel to work

On-Site Free Parking Availability at Work in Washington, DC Metro Area Parking Benefits Many employers provide parking for free or at heavily subsidized rates, which encourages driving alone. On-Site Free Parking Availability at Work in Washington, DC Metro Area Qualified parking can be either: Parking at the worksite or Parking at a location from which an employee commutes to work by transit, vanpool, or carpool (e.g., Metro parking facility) Only mention parking cash out in passing since it’s not that popular of a program in the area. Source: Metropolitan Washington Council of Governments, Commuter Connections State of the Commuter Survey 2016. Prepared by LDA Consulting, June 30, 2016.

Additional taxable salary (or a tax-free transit or vanpool benefit) Parking Cash Out Employee can choose between Creates an “opportunity cost” for parking Employee may choose to carpool, use transit, vanpool, bicycle, walk, or other option A free parking space Additional taxable salary (or a tax-free transit or vanpool benefit) OR

How do commuter benefits work? Tax law excludes these benefits from gross income for purposes of taxation, up to specified limits No federal payroll tax (i.e., Social Security, Medicare) No federal income tax Commuter benefits are non-taxable income Employer-paid benefits have no tax associated with them. Employee-paid benefits involve converting taxable salary into a non-taxable benefit (functions like a tax deduction) Commuter benefits are not a federal tax credit Maybe consider separating out these slides.

How do Commuter Benefits Save Money for Employees? Employer-paid commuter benefits are non-taxable income – employees pay no income or payroll taxes on them. If the employer pays for a commuter benefit, it does not show up as income

How do Commuter Benefits Save Money for Employees? Employees who reserve income on a pre-tax basis for commuter benefits convert taxable income to non-taxable (functions as a tax deduction). Here’s a sample of how one employee’s pay stub shows a pre-tax commuter benefits deduction – a separate line item after medical, dental, disability, and 401(k) deductions. At year end, this amount reduces the amount of taxable income on the employee’s W-2 form. (“Ptx Met Ck” is “Pre-tax Metrochek”)

How do Commuter Benefits Save Money for Employers? Non-taxable for payroll taxes Employers don’t have to count a transit/vanpool benefit like regular income to employees, so they do not pay payroll taxes on it. Like any corporate expense, the cost of commuter benefits (and fees) are tax-deductible as a business expense Commuter benefits are not special in this regard. Noteworthy that for a profitable company (one that pays corporate income taxes), it costs the employer less money to give the benefit than its face value.

Employer-Paid Benefits Give Employees More Take-Home Pay $115 Salary Increase $115 Tax-free Commuter Benefit $115 Federal income tax (25%) State income tax (8%) FICA tax (7.65%) No FICA tax or income tax A $115 salary increase produces only $68 in take-home pay Commuter Benefits Beat Salary Increase A tax-free commuter benefit is better than a salary increase for both the employer and the employee: The employer pays no FICA tax, and The employee pays no FICA or federal (and in most cases, state or local) income tax. The employer can deduct the cost of any corporate expense (salary or a qualified transportation fringe benefit) for purposes of calculating corporate income taxes (similar to how an individual can itemize deductions to pay less personal income tax). This is why it costs less than $100 to offer a $100 salary increase. The example above (and on the following page) assumes a 34 percent corporate income tax rate for the employer. $68 $115 but employees take home a full $115 in commuter benefits $0 Employer Employee Employer Employee

Employer-Paid Benefits are Cheaper for Employer than a Salary Increase $115 Tax-free Commuter Benefit FICA tax $115 FICA tax (7.65%) $115 No FICA tax No FICA tax or income tax Federal income tax (25%) State income tax (8%) Employer pays $115 for the salary increase, then pays the additional $8.80 in FICA $124 $68 $115 But employer does not pay FICA on the commuter benefit, so it costs less. $0 Employer Employee Employer Employee

Employee-Paid Pre-Tax Commuter Benefit Employer Employee $115 Employee payroll tax (7.65%) Federal income tax (25%) State income tax (8%) $47 For every $115 in regular taxable salary, employee pays $47 in taxes If the employee can reserve $115 on a pre-tax basis, s/he takes home the full amount. Thus, saving $47 in taxes. $68 $0 $115 Pre-Tax Commuter Benefit Salary Deduction

Employee-Paid Pre-Tax Commuter Benefit $115 Employer Employee Employer payroll tax (7.65%) Employee payroll tax (7.65%) Employee payroll tax (7.65%) $8.80 Federal income tax (25%) $47 Federal income tax (28%) When the employee reserves $115 of pre-tax salary, the employer does not have to pay FICA taxes. Thus, the employer also saves money. State income tax (8%) State income tax (6%) $68 $0 $115 Pre-Tax Commuter Benefit Salary Deduction

Supporting Benefits Guaranteed Ride Home Shuttles from transit to work site Providing information (transportation days/fairs etc.) Offering employees a flexible work schedule (including opportunities to telecommute) Bike facilities – racks, showers, or changing areas Providing employer-specific ridematching information Employer specific ridematching refers to widget on intranet…

Benefits to Businesses and Employees Employers Can save money directly or through increased worker retention Image improvement due to corporate social responsibility Employees Save money by spending less on gas, parking, and auto maintenance Improved quality of life through reduced commute stress Emphasize cost savings to employee.

Commuter Benefits Increase Transit Ridership, Reduce Driving Alone According to a synthesis of transit benefit studies, employee transit ridership typically increased 10-50% at worksites after program implementation Typically 10 to 25% of transit benefits recipients were new transit riders Typically, 80% or more of new transit riders were previous single occupant vehicle (SOV) commuters Source: TCRP Report – to be added.

Transit Benefits Programs Increase Transit Ridership Tucson (1998-99) Southern CA (1991-93) Washington State (1998-00) Employee transit ridership typically increased 10-50% at worksites after implementation Very wide range of effects Smallest effects found in areas with mandatory trip reduction programs Largest percentage increases found in less transit-intensive areas Philadelphia (2000) Minneapolis/ St. Paul (2003) San Francisco (1994, Urban) New York (2004) Denver (1993) Denver (2003, Urban Fringe) Philadelphia (1993) Pittsburgh (1993) Denver (2003, CBD) Philadelphia (1993b) Philadelphia (1993a) Portland, OR (1999) San Francisco (1994, Suburban) Denver (2003, Suburban) Harrisburg (1993) Portland, OR (2001) Los Angeles (2001, UCLA) Atlanta (2003) San Jose (1997) 0% 20% 40% 60% 80% 100% 120% 140% 160% Percent Increase in Transit Riders

Free Parking and Commuter Benefits are Significantly Correlated with Mode Shares in the Washington, DC Region Source: Metropolitan Washington Council of Governments, Commuter Connections State of the Commuter Survey 2016. Prepared by LDA Consulting, June 30, 2016.

Effectiveness of Parking Cash Out Programs Based on research in Southern California (Shoup, 2005), with parking cash out programs, employers saw: a 13% reduction in single-occupant driving and a 12% reduction in vehicle miles traveled A similar study of seven employer sites in Minneapolis-St. Paul where parking cash-out programs were implemented found a 12% reduction in SOV travel (Van Hattum, 2009) Effectiveness of Parking Cash Out Programs San Francisco County Transportation Authority (Tishcler, 2015) Modeling of parking cash out scenario estimated share of work auto trips drops by 6% citywide and 9% in downtown business area Minneapolis-St. Paul (Van Hattum, 2009): Analysis of 7 employer sites found a 12% reduction in single occupant vehicle travel Source 1: ACCS 2009 “Making and Impact” report Source 2: Newsweek – additional info TBD. Southern California (Shoup, 2005) Employers saw a 13% reduction in single occupant driving; a 12% reduction in vehicle miles traveled

Questions? For further information, feel free to contact Michael Grant Michael.Grant@icf.com 202-862-1211