This bill allows employees to receive one-time, tax-inclusive distributions from their unused commuter benefit accounts without jeopardizing the tax-exempt status of their remaining transportation fringe benefits.
Kirsten Gillibrand
Senator
NY
The COVID–19 Commuter Benefits Distribution Act allows employers to issue one-time, tax-inclusive payments to employees from unused commuter benefit accounts accumulated during the pandemic. This legislation provides a clear framework for distributing these funds without jeopardizing the tax-exempt status of future qualified transportation benefits.
COVID-19 Commuter Benefits Distribution Act Frees Up Stuck Transit Funds for One-Time Employee Payouts
The COVID–19 Commuter Benefits Distribution Act creates a six-month window for employers to return unused money sitting in transportation fringe benefit accounts directly to employees. Under Section 2, these one-time payments are allowed if the funds come from accounts funded by salary reduction agreements—the kind where you set aside pre-tax dollars for trains, buses, or parking. While these funds are usually 'use-it-or-lose-it' or locked into transit expenses, this bill allows that cash to be paid out directly to the worker, provided the payment is made within 180 days of the bill becoming law.
Cashing Out the Commute
For many office workers who went remote in 2020, transit accounts became digital dusty attics where monthly contributions sat untouched for years. This bill addresses that backlog by defining a 'qualified payment' as a one-time distribution that doesn't exceed the highest balance the account held between March 13, 2020, and December 31, 2023. For example, if a software developer had $800 in their transit account at the height of the pandemic but hasn't used a subway since, their employer can now cut them a check for that $800. The bill ensures that taking this cash won't disqualify the rest of the account from its usual tax-free status for future commuting costs.
The Tax Reality Check
There is a specific catch for your next tax return: these payouts are not a free lunch. The legislation explicitly states that any distribution must be included in the employee’s gross income for the year it is received. Essentially, the money loses its 'tax-free' status once it is converted from a transit credit to cash in your pocket. If a construction worker receives a $500 payout from their parking account, that $500 will be treated just like standard wages on their W-2, meaning it will be subject to income tax.
Implementation and Limits
The bill is designed as a temporary cleanup measure rather than a permanent change to the tax code. By limiting the window to six months and capping the amount based on historical 2020-2023 balances, it prevents people from using transit accounts as a general-purpose high-yield savings vehicle. Employers and payroll departments will need to act quickly to calculate those peak balances and process the payments, as any amount distributed above that historical high-water mark will not qualify under these specific rules. For the average person, it’s a way to reclaim 'trapped' money, even if the IRS takes its usual cut of the action.