May an employer provide transportation benefits under a salary reduction plan?

Author: Alice Gilman

Yes. Qualified transportation fringe benefits may be provided to employees on a pretax basis, through a salary reduction agreement. Salary reduction agreements may be positive-option agreements, under which employees elect to reduce their pay in favor of benefits, or negative-option agreements, under which employees elect to receive pay (i.e., employees are automatically enrolled into the benefit plan). Salary reduction agreements, however, cannot be part of a cafeteria plan.

Employees who elect to reduce their pay must make their elections before they become entitled to that pay. Elections must specify that the period (e.g., a month) for which the transportation benefit will be provided cannot begin before the election is made. Employees cannot revoke their elections, but can roll over unused pretax elections into the next period.