New York City Transit Benefit Requirement Fast Approaching

by FordHarrison
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As most New York City employers know by now, beginning January 1, 2016, the New York Mass Transit Benefits Law (the "ordinance") requires employers with twenty or more full-time employees working in New York City to offer their full-time employees the opportunity to elect pre-tax salary reduction to purchase "qualified transportation fringe benefits" – other than qualified parking – as permitted under the Internal Revenue Code ("Code").  This includes transit passes (e.g., MetroCard), rail commuting tickets, bus tickets, and vouchers (i.e., TransitChek) that can be exchanged for tickets and fare cards. An employer can provide reimbursement of substantiated bicycle commuting expenses as well. Other than that, cash reimbursements by the employer are subject to complicated requirements, and will not be permitted in most situations; for example, reimbursing the cost of a MetroCard purchased by the employee would not be permitted.  For purposes of the twenty-employee requirement as well as eligibility for the benefit, a "full-time employee" is one who has worked for the employer for an average of at least thirty hours per week over the preceding four-week period, any portion of which was within New York City. 

Since the required benefit is defined in terms of "qualified transportation fringe benefits" under section 132(a)(5) of the Code, only those individuals who are eligible for those benefits should be covered by the requirement. Specifically, partners, independent contractors and 2 percent shareholders of subchapter-S corporations are not eligible to receive "qualified transportation fringe benefits" under section 132(a)(5) of the Code. (They may be able to receive certain of the same transportation benefits as "working condition fringe benefits," but that is not an eligible benefit under the definition in the ordinance.) Of course, partners and independent contractors are not "employees" in any event, but in the case of an employer that is a subchapter-S corporation, a 2 percent shareholder could very well be – and likely is – an employee. In such a case, the shareholder-employee would either have to be excluded from the program, or else other tax arrangements would have to be made, including treating the benefit as taxable wages if no other exclusion were available.

The New York City ordinance requires employers to offer the opportunity to "use pre-tax earnings to purchase" the qualified transportation fringe benefits. For the benefit to be provided on a pre-tax basis, the purchase must be within the monthly limitation ($130 per month in 2016 for non-parking qualified transportation fringe benefits), and be provided pursuant to a salary-reduction arrangement that meets the requirements of the Code. Qualified transportation fringe benefits are not an eligible benefit for purposes of a "cafeteria plan" under section 125 of the Code, and so cannot be added to such a plan that is already maintained. But section 132 permits salary reduction arrangements to be used, and so long as stated requirements are met, the tax exclusions will continue to apply, i.e., the requirements relate mainly to the timing and content of the election itself. Alternatively, an employer may simply provide the employees with the required benefit, at its own expense, rather than offering them the opportunity to purchase the benefit through salary reduction. If an employer provides less than the maximum amount of benefit, employees must be offered the opportunity to elect salary reduction to purchase the remaining available amount each month.

The ordinance does not cover federal, state, or local government employers, or employers that are exempt from paying federal, state, and city payroll taxes.  Additionally, the ordinance does not require employers whose employees are covered by a collective bargaining agreement (CBA) to provide transportation benefits to unit employees; however, if the employer has at least twenty full-time employees who are not covered by the CBA, the requirement applies with respect to those employees. The Commissioner of the Department of Consumer Affairs, who has authority to enforce the ordinance, may also waive the requirement in cases where compliance is shown to constitute a financial hardship.

Employers' violations will be subject to civil penalties starting July 1, 2016, in amounts from $100 to $250 for a first violation, and $250 for subsequent violations; an employer found to be in violation will first have an opportunity to remedy the violation. Failure to provide the requisite benefits for a thirty-day period will constitute a violation for this purpose. The Commissioner of the Department of Consumer Affairs has proposed regulations implementing the law, some of which are reflected in the above discussion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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