October 17, 2023Client Alert

New Illinois Law Mandates Certain Employers Offer Pre-Tax Commuter Benefits Starting January 1, 2024

Open enrollment season is upon us, but employers who employ a substantial number of employees in Illinois may have a surprise in a new benefit that must be offered.

Illinois recently adopted the Transportation Benefits Program Act (HB 2068; P.A. 103-291) (the “Act”) which aims to promote the commuter benefits available to employees who use or may use public transportation to commute to and from work.

Which Employers? 
Covered employers subject to the new requirement are those employers operating in the City of Chicago and most of the surrounding areas (full list below) that employ at least 50 “covered employees” in a covered location.   

In order to be a covered location, the employer’s address must be within one mile of fixed-route transit service (think Chicago Transit Authority (“CTA”) or Regional Transit Authority (“RTA”)).

What Must be Offered? 
Beginning January 1, 2024, employers who meet the definition above as a covered employer must make available a pre-tax commuter benefit to covered employees. The pre-tax commuter benefit will allow employees to use pre-tax dollars for the purchase of a transit pass, via payroll deduction.  A transit pass includes any pass, token, fare card, voucher and the like entitling the employee to take public transit.  A covered employee must be permitted to elect pre-tax salary deductions to purchase a transit pass in an amount up to the maximum amount permitted by federal tax law, consistent with Internal Revenue Code (“Code”) Section 132(f).  The 2024 limit has not yet been released; however, for 2023, the monthly limit is $300. Since the commuter benefit is funded pre-tax, the employer saves 7.65% in payroll taxes on these amounts.

A covered employer may comply with the Act by participating in a program offered by the CTA or RTA.  

The Act does not detail how this benefit must be documented, and an employer’s approach to documentation might vary widely depending on whether the benefit is made available to the covered employer’s entire workforce, as opposed to just the employer’s covered employees.  Additionally, state laws on wage deductions should be considered.

Who are Covered Employees?
Covered employees are those employees who work an average of at least 35 hours per week.

Notably, an employee is counted towards the 50-employee threshold if the employer, directly or indirectly, or through an agent or any other person, employs or exercises control over wages, hours or working conditions of that employee.  Thus, temporary or agency workers may need to be counted.

The group of employees counted above must receive access to this pre-tax commuter benefit. Notably, many employers use 30- or 40-hour standards for determining full-time or part-time status; however, the “35 hour” metric is mandated. Employers should be careful to look beyond their own full- or part-time designations and use the Act’s 35-hour requirement.

A covered employee may be required to work 120 days before becoming eligible for this benefit.  However, if that waiting period is different than the “normal” benefits eligibility/enrollment timeline, an employer may wish to align its practices (so long as the waiting period does not exceed 120 days).

Where Does the Act Apply? 
The Act applies to covered employers with at least 50 covered employees in one of more of these locations:

Illinois is not the first jurisdiction to enact such a law; employers with multi-state operations should confirm which states and municipalities in which they operate may require the adoption of the same or similar type of program.  

What’s Next?
Covered employers heading into open enrollment should consider how they will comply with the Act and how the Act will impact any existing qualified transportation fringe benefit programs they offer.  Covered employers should also keep in mind that the Code Section 125 cafeteria plan irrevocable election rules do not apply to commuter pre-tax elections, such as those required under the Act.  
Employees can change their contribution election prospectively each month before the month begins, so benefit teams new to pre-tax commuter benefits should be apprised of this distinction and be ready to process elections/changes.

An employer that believes it does not meet the definition of covered employer based on location should consult the searchable map of addresses that are located within one mile of fixed-route transit service now being maintained by the RTA.

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