What Does “Whole” Mean?

Ask any human resource or relocation professional what the purpose is of most of the financial elements of their company’s relocation program (excluding incentives) and you will probably hear the word “whole” in their answer. “To keep the employee whole.” “To maintain the employee’s purchasing power.” “To ensure the employee neither gains nor loses financially.”  This objective seems to balance the goals of protecting the financial interests of the company and the employee. But what does “whole” mean?

From the company’s perspective it usually means that the employee should not experience overt gain or loss when all of the elements of the package are combined. The company also realizes, however, that it is not realistic to expect that the employee will spend exactly the same amount of money in each expense category in the pre- and post-move locations.

On the other hand, employees often consider “whole” to mean that they will not spend a dollar more in the post-move location than in the pre-move location in any expense category—not totaling all categories together but instead looking at each expense category individually. As a result, from the very beginning there is often a disconnect between what employees and employers mean by “whole,” as well as how to measure whether a relocation package is, in fact, keeping the employee “whole.”

The Disconnect

Employees often accept transfers having heard that they will be kept financially “whole" in the expense categories of taxes, housing, goods and services, and transportation, and measure the program's effectiveness one element at a time. If moving from a warm to a cold location, for example, they may consider the costs of snow removal and additional heating as being expenses for which they are not being kept “whole,” since they did not incur them in the pre-move location.

The company, on the other hand, may look at the package in its entirety and weigh the pluses and minuses of various elements combined. It reasons that since it is measuring all cost-of-living components and bridging the gap for a time (typically three years), the employee is being kept “whole” in the aggregate.

Another disconnect results when the employee considers “whole” to mean “the same,” especially with regard to housing. For example, an employee may expect to live in "the same" type of dwelling as he or she did in the pre-move location. As a result, when the Boston housing market requires the employee to settle into a Brownstone with no backyard, leaving behind a detached home on a half-acre lot in Des Moines, he may feel that the company did not fulfill their end of the bargain.

What You Can Do

The best way to eliminate this communication disconnect is to say what you mean and put it in writing. Follow three guidelines when communicating your policy:

1. Be specific; do not speak in generalities. Do not use “fat” words or words that can easily be interpreted in various ways.
2. Describe what your compensation program will and will not do for the employee and family.
3. Set realistic expectations in terms of what the employee can expect from the company and what the company expects of the employee.

Incorporate these guidelines into both verbal and written policy explanations. The example below illustrates how these guidelines can be used to clarify policy statements.

Unclear Policy Statement: The relocation program is designed to cover the costs of relocating from your pre-move location to your post-move location. The program will measure cost-of-living components and other relocation-related expenses and reimburse you for additional costs you incur as a result of the relocation.

The phrases “cover the costs” and “reimburse you for additional expenses” foster ideas of measuring costs, component by component, and being reimbursed for every dollar spent out-of-pocket in the process. These phrases conjure up scenes of employees digging through shoeboxes of old receipts to prove to the company that their program did not “keep them whole” expenditure by expenditure.

Clear Policy Statement – Example #1: The relocation program recognizes that people differ in the amounts that they choose to spend on items such as housing, education, transportation, and so on. For each of the various items that make up the program, the company aims to arrive at a “reasonable and customary” figure based on standards, using data supplied by independent consultants specializing in the determination of transferee benefits. It is not intended that this program should finance in full what you personally choose to spend on each of the various items since, before your transfer, you will already have been paying for them out of your core compensation package. The program provides an aggregate amount designed to help you assimilate into a new economy.

Clear Policy Statement – Example #2: The elements provided in the relocation program cover most of the costs incurred by relocating employees.  However, because personal circumstances and lifestyle choices vary from employee to employee, they may not necessarily cover all expenses associated with the transfer.

In these examples a more complete definition sets the expectation that the program is not intended to compensate employees according to their individual lifestyle choices. It also prefaces the objective by stating that people differ in the amounts they spend on various items and dissolves the notion that the program will, in fact, perfectly equalize all employees based on their personal lifestyle.

Such policy statements clearly communicate that it will not necessarily keep the employee “whole” in each individual expenditure category, but does strive to assist the employee in acclimating into a higher-cost economy or to cover most of the costs incurred. These statements not only set realistic expectations but outline how the company measures effectiveness—in the aggregate—not each element independently.

The words you choose and the message you send to relocating employees are important. While you may know perfectly well what you mean when you use words like “whole” or “protect,” choose your words carefully. Be specific.  Explain exactly what you will and will not provide, and what you expect from the employee, not just what the employee can expect from the company. This will help avoid setting unrealistic expectations in the minds of your transferees.

Congress periodically revises the rules for figuring taxes on gains realized from sales of personal residences. A key change liberalized and simplified the rules for sales after May 6, 1997 -- the date the legislation took effect.

 

Gone are the rules that allowed sellers to defer capital-gains taxes on their past profits only if they met these two requirements: (1) purchase a replacement residence that cost more than what was received for the one sold; and (2) make the purchase within a period spanning two years before and after the sale. Alternatively, those selling after attaining age 55 could permanently exclude up to $125,000 of gain without buying another dwelling.

What the home-sale rules now generally allow is an “exclusion,” meaning escape from taxes, on a profit of as much as $250,000 for those who file single returns and double that amount -- a full $500,000 – for joint filers. Remember, that's profit, not sales price.

Contrast the old requirements with the new ones, which are unconcerned with how old the sellers are or whether they buy cheaper replacements or even go into rentals. Unlike the old once-in-a-lifetime exclusion, the new exclusion is not a one-time opportunity. Homeowners get to claim the exclusion as often as every two years, provided they pass these tests: (1) owned and lived in the property as a principal residence for at least two out of the five-year period ending on the sale; and (2) at least two years have elapsed since last using the exclusion.

 

Sellers with passing grades reap a phenomenal break that relieves the vast majority of them of all capital-gains taxes on sales of their principal residences, whether houses, condos, or co-ops. That’s the good news. The bad news is a drastic hike in taxes for many sellers in costly housing markets.

 

As is true of most tax measures, the new exclusion helps some and hurts others. What happens after they open the envelopes? The biggest winners: people who want to sell and relocate from expensive housing markets like New York or San Francisco to less expensive areas like Tampa, Fla., or Tucson, Ariz. Also helped are sellers who become renters, perhaps because they are "empty-nesters" (folks whose children have moved out and left them with houses that are too big and too expensive to maintain), as well as those near retirement or compelled to sell because of job switches, health problems or financial setbacks.

The new exclusion is a boon to downsizers, adding flexibility to their financial planning. They can sell their dwellings for sizable gains, switch to smaller quarters and the lower maintenance expenses that go along with it, and channel their inflation-swelled profits, undiminished by taxes, into business ventures or into retirement funds to supplement Social Security benefits. Another option is to use some of the freed-up funds for gifts of money, stocks and the like, so as to shift income from themselves to family members and others in lower brackets, as well as reduce the value of assets subject to onerous estate taxes that come due at death.

Among those with nothing to cheer about: sellers in areas where property values have increased dramatically or who have accumulated gains (profits from before May 7 1997, sales that were sheltered under the old rules by trading up to more expensive houses) above the exclusion amount of $250,000/$500,000. The IRS duns them for capital-gains taxes on anything above the exclusion amount.

All is not lost when the gain exceeds the cap of $250,000/$500,000. Assume a married couple’s home-sale gain is $800,000. Their exclusion of $500,000 leaves them with a taxable gain of $300,000, taxed at a top rate of 15 percent for 2005. But the couple can further reduce that $300,000, should they have losses from sales of other investments, such as stocks, bonds and mutual fund shares – to cite some of the possibilities. Without the home-sale gain or other capital gains, their investment losses would be only partly deductible because of the long-standing dollar limit on the allowable deduction for capital losses. The 2003 tax act left unchanged the ceiling of $3,000 ($1,500 each for married couples filing separate returns) in any one year on the amount of net capital losses that can be deducted from ordinary income.

Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." This article is excerpted from his guide, "Home Sales," a complete, authoritative analysis of strategies that enable home sellers to capitalize on frequently missed opportunities and avoid pitfalls. Send $9.95 for an e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to: J. Block, 3 Washington Square, #1-G, Larchmont, NY 10538-2032. Contact him at julianblock@yahoo.com.          

During the past several years Boston’s housing market has been red-hot.  Trends of 10-20% increases in home market values in 2002 grew to 15-20% in 2003.  The Center for Economic & Policy Research’s report, “The Run-up in Home Prices:  Is it Real or is it Another Bubble?” named Massachusetts as the national leader in home market value increases during the past five years.  According to the article, Massachusetts had a five-year average increase of 10.6%, a one-year average increase of 10.1%, and increased an average of 7.7% since 1980. 

Recent Runzheimer research indicates that the Boston housing market is cooling off.  Home market value increases slowed to 7-10% in 2004 and 5-10% in 2005.  One reason for the slow-down is that people are moving further away from the city.  The Harvard University’s Joint Center for Housing Studies “State of the Nation’s Housing 2005” report noted that one third of Boston households live 30 miles out from the city center, and one in five households live at least 40 miles out.  In the largest metropolitan areas the number of people making a daily commute of one hour or more increased two million from 1990 to 2000. 

Runzheimer trends for the area south of the city have not shown as much decrease as the rest of Boston, with 2004 home market value increases of 10-12% and 2005 of 10-15%.  The Barnstable area, further south of Boston towards the Cape, showed increasing trends:  10-15% in 2003, 13-18% in 2004, and 15-20% in 2005.

Rising gas prices in the wake of Hurricane Katrina and the fact that so many homeowners live far away from the Boston city center create interesting supposition on the future of the Boston housing market.  If people can no longer afford to commute long distances, one might expect to see a softening of the housing market in those south areas of Boston.  Only time will tell how much of an effect Hurricane Katrina and subsequent gas prices will have on housing markets such as Boston's.

The cost of combating symptoms of the fall flu the old fashioned way will cost you around $20 this year.  The Center for Disease Control recommends treating flu symptoms by resting, drinking plenty of liquids, avoiding alcohol and tobacco, and relieving the symptoms of the flu with medications.  The table below illustrates the average price of a “flu recovery kit” in various locations:

Flu Recovery Kit Costs*
	Los Angeles, Calif.	Detroit, Mich.	Atlanta, Ga.	Richmond, Va.	Boston, Mass.	Dallas, Texas	St. Louis, Mo.	Billings, Mont.
Canned Soup	$1.50	$0.92	$0.97	$0.89	$1.01	$1.01	$1.02	$0.65
Soft Drink	$1.60	$1.32	$1.37	$1.49	$1.54	$1.49	$1.12	$1.22
Pain reliever	$8.70	$8.59	$8.64	$8.52	$8.27	$8.53	$7.24	$8.09
Vapor Rub	$3.62	$3.83	$4.31	$3.67	$3.40	$3.71	$3.28	$3.14
Multi Vitamins	$6.79	$6.67	$5.94	$6.61	$6.74	$5.56	$7.45	$6.12
TOTAL	$22.21	$21.33	$21.23	$21.18	$20.96	$20.30	$20.11	$19.22

And if the home remedies don’t seem to work, opting for a visit to the doctor will cost you a little more—about $73 for the locations examined.

The Cost of a Doctor Visit**
	Los Angeles, Calif.	Detroit, Mich.	Atlanta, Ga.	Richmond, Va.	Boston, Mass.	Dallas, Texas	St. Louis, Mo.	Billings, Mont.
Doctor Visit	$83.33	$65.57	$74.32	$70.50	$72.67	$73.17	$73.33	$74.97

*includes the average price (without tax) of one can of chicken noodle soup, a 2 liter bottle of soda, one bottle of over-the-counter pain reliever, bottle of vapor rub, and a bottle of multivitamins

**office doctor visit for medical advice or simple treatment

What difference does a few days make?  When looking to trim relocation costs, sometimes a simple and logical policy change will make a worthwhile difference. 

The table below illustrates two different policy scenarios for transferring employees to Houston, Texas.  Column A illustrates a typical policy that allows for 45 days of temporary living.  Column B illustrates the same policy components but with only 30 days of temporary living.  Also, since commutation trips are typically taken every 14 days, limiting the policy to 30 days of temporarily living also results in savings from having to purchase one less airfare.

Many companies decide to implement cost savings initiatives into their lump-sum allowance program by doing a study of what employees are actually using instead of mirroring the written policy exactly.  For example, a policy might say the company will reimburse for "up to 45 days of temporary living,” but when the company reviews previous expense reports they may find that their employees average 30 days of temporary living.  

Origin:  Milwaukee, Wisconsin Destination: Houston, Texas Family Size:  2 Adults/2 Children	A	B
Home Finding
Airfare (2 RT tickets, employee & spouse)	$600.00	$600.00
Car Rental (7 days)	$255.99	$255.99
Child Care (7 days)	$1,512.00	$1,512.00
Lodging (6 nights)	$723.00	$723.00
Meals (7 days/2 adults)	$872.20	$872.20
Subtotal	$3,963.19	$3,963.19
Temporary Living
Initial Travel Airfare (1 RT ticket)	$300.00	$300.00
Commutation Airfare (A=2 RT tickets, B=1)	$600.00	$300.00
Car Rental (14 days)	$511.98	$511.98
Lodging (A=45 nights, B=30 nights)	$3,510.00	$2,340.00
Employee Meals (A=45 meals, B=30 meals)	$1,682.10	$1,121.40
Subtotal	$6,604.08	$4,573.38
Final Move
Airfare (4 one-way tickets)	$1,032.00	$1,032.00
Lodging (2 nights)	$241.00	$241.00
Meals (2 days/2 adults)	$249.20	$249.20
Meals (2 days/2 children)	$124.60	$124.60
Subtotal	$1,646.80	$1,646.80
TOTAL	$12,214.07	$10,183.37