The best kind of benefit is a fringe benefit, right?
As it turns out, the IRS has a guide  for Federal, State, and Local Governments (FSLG) governing the tax rules of fringe benefits and the reporting of fringe benefits! We ran into this the other day as my lovely wife was signing up for a parking pass at her school. As a graduate student, she’s technically faculty and an employee. Since it’s a public university, the University of Maryland, that makes her a government employee.
So she’s signing up for this parking pass and one checkbox surprised her:
I understand and agree that by giving authorization to have automatic parking deductions taken out of my paycheck the deduction will be on pre-tax basis and will not be included in my Federal, State or FICA wage base.
That’s when she asked me if she was reading it right – “Does that mean I’m paying for my parking pass with pre-tax money?”
The short answer is yes, the IRS lets the university offer that as a benefit up to $230 a month.
It’s surprising because it’s something neither one of us had experienced before. Any time you can pay for something pre-tax, you do so because it represents an immediate discount. We’re somewhere in the 25% tax bracket  after deductions so everything pre-tax is an immediate 25% off.
Qualified Transportation Fringe Benefits
We knew it was legitimate because it was a University of Maryland website, it’s unlikely they’d run afoul of tax law without reviewing it a bazillion times (red tape FTW!) but I had to dig deeper and find out more. It turns out most public universities do it this way because they’re allowed to under the Qualified Transportation Fringe (QTF) Benefits rules.
The rules state you can (limits are $230 a month):
- Commuter transportation in a commuter highway vehicle
- Transit passes
- Qualified parking
- Qualified bicycle commuting expenses
The part that confused is that you can provide the benefit by way of a salary reduction agreement, which basically provides the benefit pre-tax without additional expense to the school.
Tricky huh? For our purposes, she can get $230 in qualified parking benefits each month and through a salary reduction agreement, pay for it with pre-tax dollars.