On June 9, 1998, President Clinton signed the Transportation Equity Act for the 21st Century (TEA-21) into law. In addition to reauthorizing the transit and highway programs through fiscal year 2003, it made several changes to the Internal Revenue Code (IRC), including a provision found in Section 9010 affecting the transit and vanpool benefits, which are considered qualified transportation fringe benefits under 26 USC 132(f).
Prior to passage of TEA-21, the IRC allowed employers to only provide transit or vanpoool benefits in addition to, and not in lieu of, compensation. Under the changes made by TEA-21, effective during tax years beginning after December 31, 1997, employers may continue to provide these benefits in addition to current compensation paid to their workers or, for the first time, in lieu of their existing compensation.
Equal Tax Treatment
The passage of TEA-21 gives transit and vanpool benefits the same tax treatment as parking benefits were given under the Taxpayer Relief Act of 1997. These benefits are not, however, permitted to be part of "cafeteria" plans or flexible spending accounts established by employers on behalf of employees.
Additionally, the limit on nontaxable transit and vanpool benefits is increased from $65 to $100 per month for taxable years beginning after December 31, 2001. All benefits remain indexed for inflation; however, the indexing mechanism is suspended during the taxable year beginning after December 31, 1998. Therefore, transit and vanpool benefits will remain at $65 per month and parking will remain at $175 per month for calendar years 1998 and 1999. The indexing mechanism will resume for taxable years beginning after December 31, 1999.