IRC Section 132(f), the qualified transportation fringe benefits provision, lets employers give employees up to $340 per month tax-free in 2026 for transit passes, vanpool rides, and workplace parking. The benefit can be employer-paid, funded by the employee through a pre-tax salary reduction, or a mix of both. Either way, the excluded amount escapes federal income tax and payroll taxes on both sides of the paycheck.
The Three Benefits That Qualify
Section 132(f) covers exactly three commuting categories, and each has its own definition.
Transit passes. Any fare card, voucher, token, or similar item that gets an employee onto mass transit qualifies. Bus, rail, subway, ferry, and commuter train are all in. The carrier does not have to be publicly owned; private transit operators count as long as the pass is used between home and work.
Qualified parking. A parking space at or near the workplace qualifies, and so does parking at a location where the employee catches a bus, train, vanpool, or carpool to work. Parking at or near the employee’s home is excluded by statute, even when the employee drives from home to a transit stop.
Vanpooling. The vehicle must seat at least six adults besides the driver. Two usage tests apply: at least 80 percent of the vehicle’s annual mileage has to be employee commuting, and at least half the seats (excluding the driver) have to be filled with commuting employees on each trip. Fall below either threshold and the benefit loses its tax-free status.
2026 Monthly Limits
For 2026, the exclusion is $340 per month for transit and vanpool combined, plus a separate $340 per month for qualified parking. Both caps apply per employee, per month. The 2025 figure was $325.
Anything above the monthly cap is taxable. A $400 monthly parking benefit means $340 is excluded and $60 is added to the employee’s wages for income tax and payroll tax purposes.
How the Benefit Reaches the Employee
Employers can pay for the benefit directly, let employees fund it with pre-tax salary, or combine the two.
When the employer pays, the employee gets the transit pass or parking and the amount never appears as wages. The tradeoff sits on the employer’s side: the cost of providing the benefit is not deductible.
With a salary reduction, employees elect to set aside part of each paycheck before tax is calculated. An employee redirecting $340 per month toward transit keeps that $340 out of federal income tax, Social Security tax, and Medicare tax. Because the combined FICA rate is 15.3 percent (12.4 percent Social Security, 2.9 percent Medicare), both sides save on payroll taxes for every dollar redirected. The statute’s “no constructive receipt” rule means simply having the choice between cash and the benefit does not create taxable income; the employee only owes tax if they actually take the cash.
Cash reimbursement is more restricted than most employers assume. For transit, cash reimbursement is only allowed when vouchers are not “readily available.” The IRS treats vouchers as readily available unless vendor fees exceed 1 percent of the voucher’s annual value or purchase restrictions effectively prevent the employer from getting the vouchers it needs. In most urban markets, electronic fare cards clear that bar, so cash reimbursement for transit is off the table. Parking reimbursement has no similar restriction.
Unused Balances Do Not Come Back as Cash
This is where employees get burned. If an employee sets aside $340 per month but only spends $280, the extra $60 rolls forward and can be used for qualified transportation expenses in later months. Some plans allow shifting an unused transit balance toward qualified parking, or the reverse, if the plan document permits it.
What the employee cannot do is take the leftover money as cash. Unused balances are not refundable, even at termination. A departing employee can submit claims for commuting expenses incurred before their last day, but any balance after that stays with the plan. Forfeited amounts can be used to cover plan administration or distributed among remaining participants. The practical takeaway: set the monthly election close to actual spending rather than automatically maxing out.
Who Is Eligible
Only employees qualify. The IRS defines the pool as current employees and certain leased employees who have provided services on a substantially full-time basis for at least a year under the employer’s direction or control. Self-employed individuals and independent contractors are explicitly excluded.
Remote workers sit in a gray area. The benefit is built around commuting between home and a workplace, so a fully remote employee with no office visits generates no qualifying expenses. A hybrid employee who commutes two or three days a week can use the benefit for those days without issue.
What Changed for 2026
Public Law 119-21, signed in 2025, made two changes to Section 132(f) for tax years beginning after December 31, 2025.
The qualified bicycle commuting reimbursement is repealed. Employers that previously reimbursed bike purchases, repairs, or accessories under this provision have to remove that piece from their transportation benefit plan or treat any bike reimbursement as taxable wages.
The nondiscrimination requirement that applied to salary-reduction parking benefits is also gone. Before 2026, pre-tax parking had to be offered on a nondiscriminatory basis. That constraint no longer applies. Transit and vanpool benefits were never subject to nondiscrimination testing, so employers can now offer any of the three categories to any subset of employees they choose.
The Employer Deduction Is Disallowed
Section 274(a)(4) bars any federal income tax deduction for the cost of providing qualified transportation benefits, whether the employer pays directly, reimburses employees, or runs a salary-reduction plan. This has been the rule for amounts incurred after 2017.
The disallowance hits the cost of the benefit itself. Administrative fees paid to a third-party benefits administrator are a separate category, though the IRS has not issued specific guidance drawing that line. For salary-reduction arrangements, the employer still saves 7.65 percent in its share of FICA taxes on every excluded dollar, which offsets some of the lost deduction.
W-2 Reporting
Benefits within the monthly cap do not appear as wages on Form W-2. Any amount above the $340 monthly limit must be included in Box 1 (wages), Box 3 (Social Security wages), and Box 5 (Medicare wages). Employers running a salary-reduction plan should keep records showing that excluded amounts were used for qualified transportation, whether through receipts, vouchers, fare card statements, or employee certifications. Cash reimbursement claims for transit need additional documentation showing that vouchers were not readily available.