On March 1, 2019, New Jersey became the first state to enact legislation, Senate Bill No. 1567 (“An Act concerning pre-tax transportation fringe benefits”), requiring employers with 20 or more employees to offer pre-tax transportation benefits (“NJ Transit Law”). The significance of this New Jersey legislation is that the state is requiring employers to offer a fringe benefit to employees that, starting in 2018, has lost its federal tax benefit for employers under the 2017 Tax Cuts and Jobs Act (“TCJA”).
Federal law allows an employee to set aside pre-tax wages that can only be used for the purchase of certain eligible transportation services. Such “qualified transportation fringes,” as defined under Section 132(f) of the Internal Revenue Code, include cost of transit passes, commuter vehicle travel, qualified parking and qualified bicycle commuting up to a monthly limitation of $265 in 2019, subject to cost-of-living adjustments.
Before the enactment of the TCJA, the cost of the benefit was deductible by the employer (i.e., reducing its overall income in a given year) and was also not taxable as income to the employee. With the enactment of the TCJA, effective January 1, 2018, while the benefit is still not treated as income to the employee, now the employer’s cost of offering such benefit to the employee cannot be deducted from the employer’s annual income.
This reversal of the federal tax benefit would have a chilling effect on any employer previously motivated by the federal tax break to offer fringe transportation benefits. The New Jersey Legislature has stepped in to make offering such benefits mandatory for employers of a certain size, despite the less favorable tax treatment under federal law.
“Employee” and “employer” are defined under the NJ Transit Law as under the “unemployment compensation law,” (R.S.43:21–1 et seq.). For unemployment benefit purposes, an “employer” is any for-profit or non-profit entity which has one or more individuals paid at least $1,000 in a calendar year. An “employee” refers to anyone who provides paid-for services to an “employer,” unless the employer can demonstrate that the individual is an independent contractor under the “ABC test.” Generally, under the “ABC test,” an individual does not qualify as an “employee” if: (a) the individual is free from the employer’s control or direction over the performance of the work; (b) the work is either outside the usual course of the employer’s business or is performed outside of all of the employer’s places of business; and (c) the individual is customarily engaged in an independently established occupation or business. R.S. 43:21-19(i)(6).
The NJ Transit Law only requires the employer to offer benefits related to transit passes and commuter vehicles, and not qualified parking or bicycles. It also does not apply to employees covered by a collective bargaining agreement until the expiration of an existing agreement. The bill provides for a public awareness campaign by the New Jersey transit authorities about the new law.
The penalty to an employer for failure to comply with the NJ Transit Law is $100 – $250 for a first-time violation, with a 90-day grace period to cure. After 90 days, each additional 30 day period of violation is subject to a $250 penalty. Costs of recovery and interest may also be charged.
The good news for employers is that the new law, while effective immediately, remains inoperative for a year from March 1, 2019 while the Commissioner of Labor and Workforce Development adopts rules and regulations for administration and enforcement. During this waiting period until March 1, 2020, employers should be gearing up to comply with the new transportation fringe benefit rules in New Jersey.