Alert / Employee Benefits
New Jersey enacts employer commuter benefit mandate

Building on its reputation as progressive enclave, New Jersey will shortly require Garden State employers with at least 20 employees to offer pretax commuter benefits to their employees.

The new law will become effective on March 1, 2020 (or, if earlier, the date New Jersey regulators issue final rules). While the law does not require covered employers to pay for employees’ commuter benefits, it does require them to permit employees to pay for or fund their own commuter benefits on a pretax basis, imposing administrative obligations and tax liability on the employers.

Lockton comment: Although New Jersey is the first state to mandate employers offer commuter benefits to their employees, there are several other jurisdictions that have similar requirements, including the District of Columbia, the San Francisco Bay area, New York City and Seattle.

Purpose and scope

The law is intended to reduce the financial burden of commuting costs on employees by mandating employers offer their employees the ability to buy transit passes on a pretax basis and set aside pretax payroll deductions the employees can use to reimburse themselves on a tax-free basis for vanpooling and park-and-ride expenses, up to limits imposed by federal tax rules.

Lockton comment: The law is likely, at least in part, a response to the recent tax reform law, under which employers can no longer deduct expenses for parking, transit passes and vanpool benefits provided to their employees. Under the tax reform law, employers owe income taxes even on pretax amounts employees set aside from salary payments to pay for commuter benefits, when these salary payments would otherwise have been deductible to the employer. The change in the tax law prompted some employers to no longer offer pretax commuter benefits. The New Jersey law forces many employers in the state to install or reinstall these benefits notwithstanding the tax implication for the employers.

Covered employers

Covered employers are those subject to the state’s unemployment insurance compensation law and that employ at least 20 people. Full-time, part-time and even temporary employees appear to be counted. Regulations will need to address when the 20-employee threshold is determined and whether employees outside New Jersey are considered. The mandate appears to apply to state and local governments, but that too will need to be addressed in regulations.

Covered employees

The law requires the employer offer to “all of that employer’s employees” the opportunity to use a pretax commuter benefit program. We suspect that means all of that employer’s employees working in New Jersey, but the state will need to clarify precisely how employers are to identify their employees subject to the requirement and whether any waiting period can apply. Employees covered under a collective bargaining agreement are excluded from the mandate until the current bargaining agreement expires.

Required commuter benefits

Under the mandated pretax commuter benefit programs, employers must allow employees to purchase transit passes on a pretax payroll deduction basis. Employers must also allow employees to use pretax salary deductions to fund a bookkeeping account from which employees may reimburse themselves on a tax-free basis for vanpooling expenses, similar to the way employees may reimburse themselves under a dependent care flexible spending account for dependent care expenses. Allowing employees to fund parking reimbursement pretax is not required, except for parking at park-and-ride lots.

Lockton comment: Transit passes include any pass, token, fare card, voucher or similar item, as described in the tax code, entitling a person to transportation on public transit. Vanpools include commuter highway vehicles with a seating capacity of at least six adults (not including the driver) and 80 percent of whose mileage for the year is for transporting employees between their residences and places of employment, or for business trip travel where at least half of the vehicle’s seating capacity (not including the driver) is used.

The federal tax code limits these nontaxable benefits for transit and vanpooling to $265 per month combined (this is the limit for 2019). As noted earlier, employers won’t be able to deduct the salary payments employees use to fund these benefits, but the employer’s income tax hit and costs for administration and aggravation, may be offset, at least to some extent, by the FICA tax savings on the employees’ pretax payroll deduction contributions.

Note that employers will likely have to arrange for pretax purchase of transit passes through the employer; that is, the employer will deduct the cost of a transit pass from the employee’s pay on a pretax basis and then directly distribute the pass or similar item to the employee. That’s because the tax code permits employers to reimburse on a pretax basis transit pass purchases by employees only where transit vouchers or similar items are not readily available for direct distribution by the employer.

To accommodate transit pass purchases and the administrative planning required to process claims for reimbursement of vanpooling and park-and-ride expenses, many employers will be forced to engage a third-party vendor.

Enforcement

Employers who fail to comply with the statute face penalties of at least $100 to a maximum of $250 for the first violation. An employer will have 90 days to offer a pretax commuter benefit program before any penalty applies. After 90 days, each additional 30-day period in which the employer does not offer a pretax commuter benefit program constitutes a subsequent violation and a penalty of $250 is imposed for each subsequent violation. A penalty will not be imposed on any individual employer more than once in any 30-day period.

Lockton comment: The law is not clear whether the penalty applies per affected employee or on some other basis. If it’s merely a flat $250 per month penalty on the employer, it will be cheaper for most employers to simply pay the fine than to suffer the tax consequences of offering the commuter benefits.

ERISA and cafeteria plan implications

Although ERISA pre-empts state and local laws to the extent they directly or indirectly relate to an employer’s ERISA benefits plans, tax-favored commuter benefits are creatures of the federal tax code, and not ERISA. Therefore, employers appear to have no ERISA pre-emption argument against the statute.

While employee deductions for commuter benefits are pretax, these programs do not operate under the tax code’s cafeteria plan rules. Thus, employees are permitted to change their pretax elections at any time, subject to limits imposed by the employer, and carry over unused benefits to a subsequent year. However, employees may not cash out unused pretax monies.

What employers should do now

Affected employers should soon begin developing and budgeting for their commuter programs to be prepared. We recommend affected employers establish a written commuter benefit program, setting forth precisely the terms and conditions of participation, benefits and their limitations, and other relevant program terms. There are vendors who provide commuter benefit program administration for employers to make employer-sponsored commuter benefit plans easier on the employers.

Not legal advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Compliance Services group are not privileged under the attorney-client privilege.

View this alert
    
< Back to Insights & Publications
Discover more Insights & Publications  |  Read more in the Lockton Newsroom  |  See our Client Stories
Read more in the Lockton Newsroom
See our Client Stories