A recent New York Times story shed light on a major problem facing some taxpayers who chose to have income set aside tax-free for transit and parking spending at their jobs.
The Times article noted that because many workers stopped commuting to their workplace on a daily basis -- but their tax-free benefits cannot be used for purposes other than transit or parking expenses at work -- some people have hundreds of dollars sitting idle that they cannot get back:
Many commuters have hundreds or even thousands of dollars tied up in transit benefits — money they earned and cannot use for other purposes like bills and mortgages. And they risk losing these benefits entirely if they are laid off or change employers, or if they simply do not go back to taking public transit.
The Times reported that the Treasury Department has said “[e]xisting rules already provide flexibility by allowing deductions to be reduced or stopped.” For example, if a worker was setting aside $100 per month tax-free for their transit costs to and from work — approximately 37 percent of the $270 monthly limit on this tax-free benefit — but is no longer commuting to work due to the pandemic, they could adjust that set-aside to $0 at any time, according to Treasury.
Two major problems remain, though:
- As the Times reported, some taxpayers have hundreds of dollars sitting unused, and may return to either reduced transit use post-pandemic or to even no transit use at all.
- For workers who were separated or let go from a job during the pandemic — and there are millions across the nation — those unused benefits disappear forever. If someone had, say, $500 in unused transit benefits and then was let go, they would never again have access to that $500 that they set aside from their income.
Congress and New York’s Metropolitan Transit Authority (MTA) have asked the Internal Revenue Service (IRS) to permit more flexibility here, including possibly allowing users to access those funds for non-transit purposes. But Congress may need to step in here.
Congress has already diligently worked to provide COVID-era flexibility to the owners of health and dependent care flexible spending arrangements (FSAs). There have been bipartisan champions for these policies, such as Rep. Brad Wenstrup (R-OH), Rep. Mike Kelly (R-PA), Rep. Cindy Axne (D-IA), and Sen. Joni Ernst (R-IA). This work is critical, and NTU has strongly applauded these efforts.
However, lawmakers may also want to consider legislation that allows workers with transit benefits a one-time distribution from their unused benefits, sometime during calendar year 2021 or 2022, that could be taxed as ordinary income.
Congress should also consider solutions for the second major cohort of affected Americans — individuals who were separated from a job and lost their benefits forever. Due consideration must be given to businesses that have liquidity concerns or have gone belly-up during the COVID recession, of course. But lawmakers can and should explore ways to return this lost income to workers who lost a job through no fault of their own.
NTU has played an active role in promoting fringe benefit flexibility during the pandemic, both in Congress and at the federal agency level. We hope Congress can take the next step in relief efforts and provide support for owners of tax-advantaged transit benefits.