Soon, many District of Columbia employers will be subject to a new “parking cash-out” law designed to promote environmentally friendly commuting options, i.e., other than individual commutes by automobile.  At a high-level, parking cash-out laws generally require employers that provide free or subsidized parking to offer to pay employees cash in lieu of the subsidized parking if the employee uses another commuting method. Failure to satisfy the act’s requirements may result in the imposition of civil fines and penalties.

The Transportation Benefits Equity Amendment Act of 2020 (the “Act”) became effective June 24, 2020, but originally contained a funding provision that delayed its operational effect.  Similar legislation has been in place in some areas for over 20 years.  The D.C. Council has since repealed the funding provision, and we expect the Act’s requirements to take effect in mid-November 2020.  The timing of the Act’s adoption has raised some eyebrows, as many employers and employees are seeking ways for employees to commute that avoids crowded public transportation in light of the ongoing COVID-19 pandemic.

As this post discusses, the Act’s requirements pose difficult compliance questions for employers.  Guidance would be welcome in helping employers implement the Act, and will hopefully be forthcoming soon.  Employers are encouraged to consult with tax and benefits counsel as they evaluate their fringe benefit programs for compliance with the Act.

Which Employers Does the Act Apply To? 

The Act applies only to employers with 20 or more employees which offer “parking benefits,” as defined in the Act.  A “parking benefit” is “personal motor vehicle parking, on or within 0.5 miles of the business premises and located in the District, offered to an employee, in addition to compensation, either directly by the employer or through an employer subsidy, for which the employee pays nothing or less than market value.” (Parking benefits for employees who are required to use a personal motor vehicle to perform their work are excluded from the definition.)

Market value” is defined as “the publicly-advertised price of parking available for rent to the public at a privately-owned parking facility within one-quarter mile of the business premises,” or, if there is no such facility, an amount calculated pursuant to forthcoming District Department of Transportation (“DDT”) guidance.  Unless guidance provides further clarity, it appears that employers may rely on any publicly advertised price for parking within the one-quarter mile radius in determining what the applicable market value is.  The Act does also not define “employer subsidy,” so it remains unknown whether, for example, offering employees the ability to set aside money on a pre-tax basis to pay for parking would be an “employer subsidy.”

What the Act Requires

Under the Act, covered employers that offer parking benefits must also undertake one of three initiatives to promote methods of commuting other than by individual car trips:

  1. Offer a “Clean-air Transportation Fringe Benefit,” which is defined as including transportation on a commuter highway vehicle in connection with travel between the employee’s residence and place of employment, a transit pass (g., WMATA metrorail benefits), or qualified commuter bicycle commuting reimbursement benefit (which following adoption of the Tax Cuts and Jobs Act, is treated as a taxable fringe benefit), each as defined in Section 132(f)(5) of the Code. The Clean-air Transportation Fringe Benefit is discussed in more detail below.
  2. Pay a Clean Air Compliance fee to the DDT. The amount of the fee is $100 per month for each employee offered a parking benefit—not each employee who uses the parking benefit; additional guidance on this point would be welcome, particularly since D.C. employers are likely to have a high percentage of employees who prefer to commute by public transportation, but who may nonetheless have the option of using a parking benefit.
  3. Implement a transportation demand management plan that would annually reduce by 10% the number of commutes made by car, including for-hire vehicles, until the total number of car-based commutes is 25% or less of all commutes. The transportation demand management plan must be approved by the DDT, which will also assess compliance with the plan.  Noncompliant employers will have a chance cure deficiencies, but if they fail to do so, they will be required to offer Clean-air Transportation Fringe Benefits or pay the Clean Air Compliance fee.

Offering a Clean-air Transportation Fringe Benefit may be the most appealing option to employers, many of which are likely to already offer transit pass benefits.  However, the Act imposes certain requirements that employers should keep in mind in evaluating their options.

  • Offering Clean-air Transportation Fringe Benefits and Parking Benefits Simultaneously: Under the Act, an employee may only accept the Clean-air Transportation Fringe Benefit if he declines parking benefits.  This restriction raises the question of what would happen if an employer allows employees to take advantage of both transportation benefits that would qualify as Clean-air Transportation Fringe Benefits and parking benefits that meet the definition under the Act.  The Act appears to prohibit employers from allowing employees to use both such benefits simultaneously, so employers should tread carefully if they offer such hybrid benefits.  (Because “parking benefits” under the Act include only parking in the vicinity of the employee’s workplace, subsidized parking provided at a WMATA park-and-ride facility would presumably be permissible.)
  • Amount of Clean-air Transportation Fringe Benefits: A Clean-air Transportation Fringe Benefit must be equal to or greater than the market value of the parking benefit that is offered to employees.  An employee who accepts the Clean-air Transportation Fringe Benefit is required to estimate the amount of the benefit that he will use on a monthly basis; this estimate may be updated annually.  Presumably, guidance will allow (or at least not prohibit) employers from allowing employees to update their estimate more frequently, in case, for example, they move and their transportation costs change.
  • Additional Payments Necessary if an Employee Uses Less than 100% of the Clean-Air Transportation Fringe Benefit: In the event an employee estimates that he will use less than 100% of the amount of the Clean-air Transportation Fringe Benefit, the employer is required to make up the difference by (1) providing additional compensation to the employee, (2) increasing the employer contribution to the employee’s health coverage, or (3) a combination of 1 and 2.  In other words, if an employee’s commute by Metro would cost $175 per month, but the employer provides an option to park at the workplace that has a fair market value of $300 per month, the employer would be required to either pay $125 per month in additional compensation (which would be wages subject to tax) to the employee, make an additional contribution of $125 per month to the employee’s health coverage, or some combination of the two equal to $125 per month.  This requirement creates a number of potential complications for employers attempting to comply with the Act.  For example:
    • Would offering additional employer contributions to only certain employees implicate nondiscrimination testing concerns for the health plan?
    • If the employer’s workforce is collectively bargained, will providing additional compensation or employer health coverage contributions violate the collective bargaining agreement?

Reporting Requirement

The Act also requires covered employers who offer parking benefits to report the following : (1) the total number of employees; and (2) the number of employees (a) offered a parking benefit, (b) using a parking benefit, (c) offered a Clean-air Transportation Fringe Benefit, and (d) using a Clean-air Transportation Fringe Benefit.  The Mayor may require additional information.  The first report must be filed 90 days after the Act’s applicability date (which we expect will be mid-November 2020), and subsequent reports must be filed every two years.

Certain employer exemptions and provisions delaying the effect of the Act on certain employers are discussed below.

Exemption for Employer-Owned Parking Lots and Delayed Applicability to Current Leases

The Act generally applies to employers of 20 or more employees who offer parking benefits, defined above.  However, the Act provides for certain exemptions or delayed applicability, as follows:

  • Employer-owned parking spaces: The Act does not apply to employers which offer parking benefits using parking spaces that the employer owns on, and continues to own after, the Act’s applicability date, which we expect to be mid-November 2020.
  • Currently leased parking spaces: The Act’s applicability to an employer who leased on, and continues to lease after, the Act’s applicability date will be delayed until the end of the current lease term, even if the lease agreement contemplates extensions of the lease.
  • Current party to a transportation demand management plan or Campus Plan: The Act also provides for delayed applicability to employers who are party to a transportation demand management plan or a Campus Plan.
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Photo of Sarah Friedman Sarah Friedman

Sarah Friedman helps clients navigate the complex regulatory requirements of ERISA, the Internal Revenue Code, and other applicable federal and state or local laws. Her practice covers all aspects of tax-qualified retirement plans, health and welfare plans, and executive compensation.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.