Since taxable year 2003, the monthly limitation under IRS Section 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount has risen to $100 for transportation in a commuter highway vehicle and for any transit pass. The monthly limitation under Section 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is now $190.  Transit and vanpool benefits are considered qualified transportation fringe benefits under 26 USC 132(f).

Prior to passage of TEA-21, the IRS allowed employers to provide transit or vanpool benefits in addition to, and not in lieu of compensation. Under the changes made by TEA-21 and the Taxpayer Relief Act of 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.  Transit and vanpool qualified transportation fringe benefits can now be used as follows:

1. Benefits in Addition to Compensation - Employers may give their employees up to $100 per month in benefits to commute to work by transit or by eligible vanpools. The employer pays for the benefit and receives an equivalent deduction from his business income taxes. Employees receive the benefit completely free of all payroll and income taxes, in addition to their current compensation.
   
2. Benefits in Lieu of Compensation - Employers may permit their employees to set aside some of their pre-tax income to pay for transit or eligible vanpools.  Employers do not pay for the benefit, but permit employees to use some of their gross income to pay for commuting expenses before taxes are computed, up to $100 per month.  Employees save on payroll and income taxes on the amount of the benefit they purchase, since that amount is no longer treated or reported as taxable salary.  Employers' payroll costs are reduced since payroll taxes do not apply to the set-aside amount; rather it is treated as a benefit.
   
3. Combination - Employers may share the cost of commuting with their employees.  Employers can give their employees part of the commuting expense tax-free in addition to their compensation and

4. Parking Cash-Out - Employers may establish a parking cash-out program whereby employees may choose to cash out the value of employer-provided parking, forego parking, and receive the taxable cash value of the parking, or receive a tax-free transit or eligible vanpool benefit up to $100 per month.  The employer transfers its expenditure for the parking space, assuming it is leased, to a direct payment to the employee.  If the employee accepts the cash value rather than a tax-free transit or vanpool benefit, then the employee also incurs payroll and income taxes on the amount.  The employer only incurs payroll taxes on the cash value provided.  This additional compensation will allow the employee to finance other commuting modes that are not considered qualified transportation fringe benefits, such as walking, bicycling, carpooling, roller blading or other means of commuting to work. http://www.fhwa.dot.gov/tea21/factsheets/trbenefi.htm
   

Employers can provide commuter benefits in several ways:

• The employer can purchase vouchers or passes under a public transportation program and distribute the vouchers to employees. Employees can exclude up to $100 worth per month.
  

• The employer can reimburse employees for transit passes or vanpooling over and above regular wages.  An employee is not taxed on the reimbursement up to $100 per month.  Cash reimbursement for a transit pass is an option