In the spring of 2019, NJ Governor Phil Murphy signed legislation making New Jersey the first state to require NJ employers to offer pre-tax transit benefits to their employees. Similar statutes are already in effect in major cities around the country, including New York City, San Francisco, Washington D.C., and Seattle.
The New Law
The new law (the NJ Transit Benefits Law) applies to all New Jersey employers with at least 20 employees, including state and local government employers. Under the NJ Transit Benefits Law, an employee is any person who is hired or employed by the employer and who reports to the employer’s work location.
That definition mirrors the one used in New Jersey’s state unemployment compensation law. There is an exemption from the requirement for federal government employers and employers will not need to offer pre-tax transit benefits to employees who are subject to collective bargaining agreements (CBAs), until those agreements expire.
Employers will need to offer the full scope of transportation fringe benefits (commuter highway vehicle and transit benefits) consistent with the provisions in Internal Revenue Code §132(f), qualified transportation benefits. The benefits must be provided at the maximum benefit levels permitted under federal law, so employees will be able to withhold pre-tax the full amount permissible for these benefits; for 2020, the maximum benefit level for transit and commuter highway vehicles is $270 per month. Additionally, employers may provide pre-tax parking benefits ($270 per month maximum benefit), but the law does not require parking benefits to be offered.
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, such as train, bus, ferry, and vanpool expenses. The employer is not required to offer a qualified parking or bicycle benefit but may offer those benefits.
While the law went into effect immediately, employers were not required to provide benefits until March 1, 2020, or, if sooner, the effective date that rules and regulations are adopted by the NJ Commissioner of Labor and Workplace Development.
For a first violation, employers will be assessed a penalty of not less than $100 and no more than $250. They will have 90 days following the finding of a violation to offer a pre-tax transit benefit before the penalty is imposed. After 90 days, employers will be fined $250 per violation that they continue to be in noncompliance with the law, being fined no more than once per 30-day period.
Employers will not be permitted to deduct the expense of the pre-tax transportation benefits from federal corporate income taxes. As a reminder, the Tax Cuts and Jobs Act (passed in late 2017) eliminated the employer deduction for transit benefits, however, this did not affect an employer’s ability to offer a parking and/or transit benefit to their employees or an employee’s ability to withhold pre-tax funds to pay for qualified expenses.
New Jersey employers that do not currently offer pre-tax transportation fringe benefits will need to offer a transit benefits program. Employers may also want to discuss the tax implications of a transit benefit program with their tax advisors.
Given the increasing popularity of these local laws, multistate and multijurisdictional employers may want to consider a company-wide program that complies with the federal regulations and offers transit benefits. Contact Us Today