Lump-Sum Allowance Programs

Doing more with less? Lump-sum allowances have been a trend within relocation for more than a decade. More than just a fad, lump-sum allowances continue to be adopted by more and more companies as their worthiness is attested to time and again.

Although the Revenue Reconciliation Act of 1993 initiated movement toward this form of “reimbursement” within the US, its merits beyond the elimination of expense reports have earned it its favorable reputation. According to Runzheimer’s most recent Survey and Analysis of Employee Relocation Policies and Costs, almost half, 48%, of administrators now report using lump-sum allowances to cover expenses for at least some portion of their relocation benefits.

The Attraction

Administrators who are asked to do more, reduce costs, keep transferees happy, and offer more value, see managed lump-sum allowance programs as a means to accomplish these strategic objectives.

What is included?

House-hunting trip expenses and temporary living expenses are often included in these programs because of their administrative burden and because the Revenue Act made them taxable, regardless of their business purpose or substantiation (receipts).

Specifically, administrators who provide lump-sum allowances use them predominantly to reimburse costs associated with house-hunting trips (70%), temporary living (65%), miscellaneous expense allowance (61%), and final move (41%). Additionally, some companies include shipment of household goods (20%), return trips to the former location (17%), storage of household goods and new home purchase costs (both at 13%). See Table 1.

Table 1 Lump Sum Allowance Components
Component	Percent of Respondents
Expenses incurred during house-hunting trips	70
Temporary living expense reimbursements	65
Miscellaneous expense allowance	61
Final move expense reimbursements	41
Shipment of household goods	20
Return trips to former location	17
Storage of household goods	13
Reimbursement of some or all costs to purchase new home	13
Shipping automobiles	11
Reimbursement of some or all costs to sell home	9
Financial assistance based on living costs	9
Payment to employee for loss-on-sale of former home	4
Tax preparation assistance	4
Property management (rental of former home)	2

 

Employer Benefits and Cost Savings

The number one benefit of lump-sum allowance programs is the elimination of auditing expense reports, as reported by 78% of administrators (Table 2). Forty-six percent report that because they spend less auditing expense reports, discussing out-of-policy expenses, and considering requests for exceptions, they have more time to explain benefits and corresponding lump-sum allowances with transferees. They also find their time better served helping transferees with family, school, and other special needs.

Table 2 Benefits of Lump-Sum Allowance Programs
Benefit	Percent of Respondents
Alleviate Burden of Auditing Expense Reports and Receipts	78%
Reduce Exception Requests	76%
Allow Relocation Staff to Spend Time on Other Projects	46%
Reduce Relocation Expenses	44%
Help Transferee to Settle in Faster at the New Location	34%

Impacts on Transferee Satisfaction
Properly structured lump-sum allowance programs reflect policy, provide a basis from which to make adjustments as

objectives change, and facilitate consistent application across transferees. Lump-sum allowances should also reflect

transferees’ move situations so amounts are fair to all. When the integrity of the lump sum calculation is

disclosed, transferees feel less compelled to challenge it. Nearly three-quarters of respondents report their transferees as either very satisfied or satisfied with their lump-sum allowance program (Figure 1). Dissatisfied transferees are likely unhappy with relocation benefits in general. Transferees do not object to the form of payment, but the corporate financial objective that was facilitated by the lump sum.

Figure 1 Degree of Transferee Satisfaction

Twenty-six percent of respondents report savings of between 11% and 30% when going to a lump-sum allowance program. Many respondents, 29%, estimate no dollar savings from lump-sum programs. Their objective in this area is to be cost-neutral (Table 3).

Table 3 Estimated Annual Savings from Replacing Expense Report Reimbursements with a Lump-Sum Program
Savings	Percent of Respondents
No savings	29%
1 – 5%	9%
6 – 10%	11%
11 – 20%	22%
21 – 30%	4%
Other	24%

Regardless of the cost-savings objective, the majority of respondents (87%) report that lump-sum allowance programs benefit their relocation program (Figure 2). The freedom afforded administrators to focus on value-add endeavors, the consistency in application of the policy, and ultimately the empowerment of employees to manage the allowance to meet their needs will continue to bolster the popularity of lump-sum allowance programs for years to come.

Figure 2 To What Degree Do Lump-Sum Payments Benefit Your Relocation Program?

 

A lump-sum allowance should not only eliminate the expense reporting process, but also identify which expense reimbursements are taxable and non-taxable.

Qualified vs. Non-Qualified Moving Expenses

Reimbursements for qualified moving expenses are non-taxable and are not reported as part of the employee’s wages. Non-qualified moving expenses, on the other hand, are part of taxable income and are reported in employees’ wages.

Qualified moving expenses include:

• The cost of moving household goods and personal effects (including in-transit or foreign-move storage expenses), and
• Travel expenses (including lodging but not meals) for one trip by the employee and each member of the household.

The cost of moving includes packing, crating, and transporting the household goods and personal effects of the employee and household members from the former residence to the new residence. Storage and insurance costs are included only for 30 consecutive days after the goods and personal effects have been moved from the former residence, and before they are delivered to the new residence. The cost of shipping the car and household pets may also be included, as well as costs for connecting or disconnecting utilities.

Travel expenses include transportation and lodging for the employee and household members while traveling from the former residence to the new residence. Household members do not have to travel together or at the same time. Additionally, travel expenses may include travel costs incurred on the day the employee arrives at the new residence and lodging expenses in the area of the former residence that occur within one day after the employee moved out of the former residence because the furniture had been moved.

The following expenses are non-qualified and must be recorded in the employee’s wages:

• Pre-move house hunting expenses,
• Temporary living expenses,
• Expenses for buying and/or selling a home (except with Amended Value or Buy Value Option transactions)
• Meal expenses,
• Expenses of getting or breaking a lease,
• Real estate taxes,
• Security deposits, and
• Storage in excess of 30 days

Ensuring that Qualified Reimbursements are Non-Taxable

The “Closely Related” Test

To ensure that reimbursements for qualified moving expenses are not taxable, the move must be closely related, in both time and place, to the start of work at the new job location. Moving expenses should occur within one year from the employees start date at the new location. Unless the employee can demonstrate that circumstances prevented the move from taking place within one year, reimbursed expenses that occur outside of the one-year window are taxable.
For a move to be considered closely related in place, the distance between the employee’s new residence and the new job location must not be greater than the distance between the former residence and the new job location.

The Time and Distance Tests

An employee move that is considered closely related in both time and place to the start of work at the new job location must also pass time and distance tests. The time test requires that the employee is employed on a full-time basis at the new job location for at least 39 weeks during the 12-month period following the move (weeks need not be consecutive).

The distance test requires that the employee’s new main job location be at least 50 miles farther from the employee’s former residence than the former residence was from the former job location, using the shortest distance of the most commonly traveled routes between these points.

Reporting

After the move, the employee must provide the employer with the appropriate receipts for the qualified expenses to comply with accountable plan rules. Qualified reimbursements, although not reported as income or subject to taxes, may be reported as a fringe benefit in box 12 of the employee’s W-2.

Non-qualified moving expenses are included as income in box 1 of the employee’s W-2, and the employer is required to withhold income tax, social security tax, and Medicare tax on this portion.

If the employee does not provide receipts, the entire reimbursement is treated as a non-accountable plan and is treated as income in box 1 of the employee’s W-2. The employer is then required to withhold income tax, social security tax, and Medicare tax on the entire reimbursement.

Line-item reimbursements for relocation-related travel expenses vary among metropolitan areas. This cost data illustrates one scenario for transferees to Minneapolis, MN of reasonable reimbursements and/or justifiable lump-sum payment amounts.

Origin: Chicago, IL Destination: Minneapolis, MN Family Size: 2 Adults/2 Children
	Minneapolis, MN
Homefinding Trip-1 trip/7 days/Employee & Spouse Airfare (2 RT tickets-employee & spouse) Car Rental (5 days)  Child Care (5 days) Lodging (4 nights/double occupancy) Meals (5 days/2 adults)  Miscellaneous  Homefinding Total	$580.00 185.50 1350.00 674.00 626.00 50.00 $3,465.50
Temporary Living-30 Days/Employee Only Initial Travel Airfare (1 RT ticket) Commutation Airfare (1 RT ticket) Car Rental (1 month)  Lodging (30 nights/corporate apartment)  Meals (30 days/1 adult)  Temporary Living Total	$290.00 290.00 816.00 2385.00 1126.00 $4,907.00
Travel for Final Move-2 Adults/2 Children Mileage (Total miles all vehicles)  Lodging (2 lodging nights) Meals-Adult (2 adult days)  Meals-Child (2 child days) Incidental Expense Allowance (3 en-route days) Final Move Total	$330.48 337.00 250.40 125.20 20.00 $1,063.08
Total Lump-Sum Payout	$9,435.58

By Mike Ghislain, VP HR, Runzheimer International

Earlier in my career, I worked for a medium-sized company that had a relatively low level of relocation activity--less than ten relocations each year. As an HR department of 1.5 full-time employees, relocation manager was just one of the many hats I wore. Had I known then what I know now about lump-sum allowances, my job would have been much easier.

I was frequently tasked with identifying the cost of a relocation “on the fly,” and often within one day as we tried to construct a reasonable offer for a top job candidate. Our relocation policy was flexible, meaning everything was handled on a case-by-case basis. Because of this, relocatees repeatedly brought me receipts for several months after the relocation, many of which were difficult to deny approval since the person’s manager told them that the company would cover the expense. The finance department often asked me to categorize taxable and non-taxable relocation expenses in order to ensure that appropriate reimbursement could be made through our payroll system. In short, our process was less than optimized and I clearly had much to learn about relocation management.

Since then, I have learned about lump-sum allowances. For a nominal fee, I receive a report that is based on our company relocation policy and includes specific costs associated with each individual’s particular relocation. The report defines exactly what the company will reimburse and distinguishes between taxable and non-taxable expenses. Now this information is available at the time of our employment offer, making it crystal clear to the candidate what the company will provide in terms of relocation benefits. Ordering the report takes a few minutes and our staff is now free to perform other more value-added tasks.

It is widely known that lump-sum allowances offer a cost-effective alternative to providing in-house relocation department services or outsourced relocation services for large corporations. What is less commonly known is that for small to medium-sized companies with understaffed HR departments, a lump-sum allowance program can often be the HR assistant that they don’t have.

Although most companies understand the processes and costs involved in administering their employee relocations or business travel programs, few, if any have a handle on the processes, costs and best practices involved in managing their total employee mobility.

Imagine employees in hundreds of cars, on dozens of flights every day, using mobile office technology in hotels, corporate apartments, on client sites, in their own homes, on domestic assignments and in overseas locations. Employees are meeting customers, creating value, and uncovering opportunities. This is total employee mobility at work. How should it be managed? What are the associated costs?

Runzheimer International is sponsoring a study to answer these questions. The first annual Runzheimer Employee Mobility Benchmarking Survey has been launched in collaboration with AIRINC (Associates for International Research, Inc.) and Dr. Jac Fitz-enz, the acknowledged “father” of human capital performance benchmarking and the founder of Saratoga Institute.

This is the first time a survey measuring total employee mobility costs and best practices of Fortune 2000 companies has ever been conducted. The survey encompasses employee mobility in the broadest sense and includes the following segments of total employee mobility: business travel, including corporate aircraft, relocations, business vehicle programs/fleet, mobile/home offices, and international assignments.

In describing why the survey is needed, Dr. Jac Fitz-enz, said, “The costs and processes associated with managing a mobile workforce are dispersed throughout an organization, with many different professional disciplines, process owners, and outsource providers involved. This fragmentation makes it difficult for organizations to evaluate their overall investment in employee mobility and to compare results with other organizations.”

Based on survey findings, survey participants who stand out as highly effective mobile organizations will be recognized for employing a best practice (or best practices) in managing total employee mobility. Following the survey, Runzheimer International will analyze and interpret survey results and communicate them through various media outlets. Runzheimer International also plans to hold the first annual conference on the topic of Employee Mobility Benchmarking in the fall of 2005.

For more information on the Runzheimer Employee Mobility Benchmarking survey, visit http://www.runzheimer.com/corpc/events/scripts/NewInitiatives.asp.