New Jersey Requires Employers to Offer Employees Pre-tax Commuter Benefits
Last month, New Jersey Governor Phil Murphy signed S.1567 into law, making the Garden State the first state to mandate a commuter benefit law, joining cities such as New York and San Francisco that have similar laws. In short, this law requires employers in the state to offer pre-tax commuter benefits to employees. While the law is currently in effect, it is not operative until the earlier of (i) 365 days following the date of enactment (March 1, 2019), or (ii) the effective date of rules and regulations that the law directs the Commission of Labor and Workforce Development to adopt.
Federal law. Before digging in further to New Jersey’s new law, let’s revisit some of the commuter benefits provisions under federal law, including a change made under the Tax Cuts and Jobs Act (passed in late 2017).
Under the Internal Revenue Code, the value of a “qualified transportation fringe” benefit provided by an employer to an employee is treated as tax-free, subject to monthly limits. A “qualified transportation fringe” is defined as:
- transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment;
- transit passes;
- qualified parking; and
- qualified bicycle commuting reimbursement.
In late 2018, the IRS released new monthly contribution limits for 2019:
- Parking – $265
- Mass Transit – $265
Employers can still provide tax-free qualified transportation fringe benefits to employees (although qualified bicycle commuting reimbursements cannot be provided tax-free). Under the Tax Cuts and Jobs Act, an employer can no longer deduct the expenses for providing tax-free transportation fringe benefits. However, employers that treat the transportation fringe benefits as taxable W-2 wages to the employee are able to deduct the expenses of providing those benefits.
New Jersey. The state’s new commuter benefits law requires employers that employ at least 20 persons to offer a pre-tax transportation fringe benefit to all of the employer’s employees that are not subject to a collective bargaining agreement. For purposes of this law, an employee means anyone hired or employed by the employer and who reports to the employer’s work location (this follows the definition under the state’s unemployment compensation law). A pre-tax transportation fringe benefit is a benefit that allows an employee to set aside wages on a pre-tax basis, which is then only made available to the employee for the purchase of certain eligible transportation services, including transit passes and commuter highway vehicle travel.
Employers can expect the Commissioner of Labor and Workforce Development to adopt rules and regulations, in consultation with transportation management associations, transit agencies in New Jersey, and third-party transit benefit providers concerning the administration and enforcement of the law’s requirements in a manner that is “most compatible with current practices for providing pre-tax transportation fringe benefits.”
Employers that fail to comply with the law are subject to a penalty of between $100 to $250 for the first violation. Before a penalty is imposed, however, employers will have 90 days from the date of the violation to offer the pre-tax transportation fringe benefit program. If, after the 90-day cure period, the employer does not adopt a pre-tax transportation fringe benefit, it will be subject to a $250 penalty for each additional 30 day period in which an employer fails to offer the benefit.
New Jersey employers should begin thinking about the steps they will need to take to provide this benefit. Areas for consideration include the specific features of the pre-tax transportation fringe benefit program, developing a document to communicate the program to employees, and coordinating the administration of requirements in other jurisdictions, if applicable. Of course, employers will want to be on the lookout for guidance from the Commissioner of Labor and Workforce Development.