Earlier this month, the Seattle City Council passed the “Seattle Transit Benefits Ordinance” which will require Seattle employers to offer employees the opportunity to use pre-tax income to purchase qualified transit benefits. The new ordinance requires all employers (with the exception of governmental and tax-exempt organizations) with more than 20 employees to adopt a Qualified Transportation Plan (QTP) as dictated by the IRS Code 132(f) by January 1, 2020.
I have written about the benefits of QTPs in the past, but the question on the table today is, how do companies in Seattle go about enacting a QTP and complying with Seattle’s new law? First, let’s determine who is impacted.
What employees are eligible?
The ordinance requires that any employee who has worked “an average of ten hours or more per week in Seattle in the previous calendar month” be offered the ability to utilize the pre-tax program. Seems pretty straightforward right? But…
Which companies are required to comply? (Hint…it’s more than you might think)
As with almost any governmental edict, the devil is in the details. And, if you are thinking a company based in, say, Kirkland with less than a dozen employees actually working within the Seattle city limits and/or has a large seasonal staff is off the hook, well, you’d be wrong.
For purposes of calculating number of employees, Section 14.30 of the ordinance includes employees who worked:
- Inside the City;
- Outside the City; and
- In full-time employment, part-time employment, joint employment, temporary employment, or through the services of a temporary services or staffing agency or similar entity.
So, basically, if you have averaged more than 20 bodies who have worked for your company in the previous calendar year, and you have any employees working in the city of Seattle more than 10 hours per week, you are required to offer the benefit.
How does my company comply?
While a formal written plan document isn’t required, the ordinance does say that employers must have “written documentation of the employer’s offer of pre-tax election commuter benefits.” Therefore, we suggest employers adopt a formal document (by resolution of the employer’s board of directors or other appropriate binding action) before the first compensation reduction. By specifying the plan design and operating rules for the plan, the employer can protect itself from claims that the plan terms are something different than intended. Examples might be:
- Which benefits are offered under the plan: transit and parking. (Parking is optional and not required by this new ordinance.)
- Monthly maximum each employee can elect. Oddly enough, Seattle’s ordinance limits the required amount to $255.00 per month, which is different from the IRS limit. The IRS indexes this limit each year and the monthly maximum for the Transit Account is $260 for 2018. The 2019 maximum limit has not been announced yet as of the publication of this article.
- Who is an eligible employee when the employer has multiple locations where only the Seattle employees would be covered by this benefit plan? Are employees in all locations eligible? Or just those working in Seattle?
- Does the employer want automatic (negative) elections for new participants and/or automatically renewing (evergreen) elections for current participants?
- Will employees be able to change their elections as often as the regulations allow or should additional restrictions be imposed?
- What is the claim process?
- Does the employer want substantiation requirements that are as broad as the regulations allow (e.g. no receipts are needed if not provided in the ordinary course of business) or more restrictive?
- Is there a minimum claim limit before claims will be reimbursed (e.g. must be at least $25)?
- What is the reimbursement process and timeliness of reimbursements?
- Does the employer want to limit reimbursements to amounts that the employee has already contributed to the plan?
- What happens with unused funds during a leave of absence, vacation or after termination of employment?
- How does the employer want to use forfeitures?
- Does the employer wish to allow carryovers of unused funds?
- Does the employer wish to process claims electronically?
Documentation is important
The ordinance requires eligible employers keep employment records verifying their number of employees for a period of three years. Additionally, we recommend employers also provide and keep records of:
- Election forms
- Compensation Reduction Agreements
- Reimbursement Request Forms
- Employee Communication Materials
- Documents Evidencing the Employer’s Adoption of the Plans
- Third-party administrator service agreement (if using a TPA – like SBA!)
What is the penalty for non-compliance?
The ordinance is quite vague on the actual penalty to the employer other than to say the Office of Labor Standards is the enforcement agency and that failure to comply with this new law is a violation. They include language that says civil penalties, unpaid compensation to employees who were harmed by not offering this benefit, liquidated damages and interest will be assessed by the Office of Labor Standards. Basically, the way I read this is, if an employee reports you for not offering the program, it’s going to be a headache of investigations and potential fines.
If you do have any questions about whether you are an eligible employer and/or if certain employees should/should not be covered, we suggest consulting with a benefits attorney to identify any federal or state laws that might interact with the new city law (e.g., wage withholding, escheat, etc.).
Finally, if an employer is required to enact a QTP under this new ordinance and has yet to implement a full Flexible Spending Account (FSA) program – which can include the ability for employees to pay for eligible health and dependent care expenses on a pre-tax basis – we’d suggest now might be a great time to look at that benefit as well. The marginal cost to add additional pre-tax benefits for employees is low.
SBA has long been a proponent of offering the Transportation Fringe Benefit programs. We’ve been administering them since 2004. We can help employers navigate this new law for a reasonable cost. Remember, not only does the employee saved Federal and FICA taxes, the employer also saves 7.65% in the FICA tax match (possibly paying for our administration fee)! Ask Gina for a quote at: [email protected].