With “flexibility” and “options” in the forefront of relocating employees’ minds, companies are increasingly considering alternative relocation policies for their U.S. domestic transferees. Core/flex programs are back in the spotlight, as they provide the flexibility the transferee desires while also providing the company a mechanism to control costs. But is there another way to have a flexible policy that controls costs and provides structure? The answer is YES! It’s called a Managed Cap program.
As the name suggests, managed cap relocation programs provide services and allowances up to a capped dollar amount that is established by the company. The key difference between a managed cap program and a core/flex program is:
The program can be structured as one tier for all employees with different cap amounts based on job level or level of specialized talent, or it can have multiple tiers – just like in a traditional relocation policy – with different policy components offered. In addition, the company can provide a managed cap move to just one level of employee (for example, entry level or recent college graduates) while higher-level employees may be provided the traditional structured policy.
The company can continue to impose caps on certain components. For example, most companies limit temporary housing to 30, 60, or 90 days based on homeowner/renter status and level of the employee. Under the managed cap program, the company can extend the timeframe to up to 180 days. Home finding trips can still be limited to one or two but can be for as many days as the employee needs.
The employee will perceive the impact of the managed cap move when they decide not to utilize certain services but elect to partake in others. Rather than reporting exceptions to policy to substitute services that the company would normally not provide, or to extend timeframes for others, the managed cap program provides the flexibility to the employee to determine which services are most applicable to their unique situation.
So how does this program work?
Suppose an employee is eligible for a $50,000 cap and is offered the following services:
• Home sale assistance (recommend Direct Reimbursement only)
• Loss on sale
• Shipment of household items
• Storage of household items
• Temporary living
• House hunting trips
• Spousal assistance
• Duplicate housing
• Final move
An unmarried employee obviously does not need spousal assistance, but may accelerate the purchase of a new home, so they may choose to utilize duplicate housing. Since the employee will also not require temporary housing and storage of household goods, they may elect to sell their home and recover some of the loss on sale. This particular employee’s needs are not the same as their colleague’s, who elects not to sell their home, their spouse requires assistance finding a job in the new location, and they need a longer stay in temporary housing. By implementing the managed cap policy, the company does not need to provide specific authorization for each policy component, but, rather, empowers the employee to determine which policy components they require.
We’ve discussed how managed cap programs can provide flexibility, options, and cost control, but there are some concerns that companies should consider when determining whether they should implement this program.
1. Most importantly, consistency is key; equality in policy administration is recommended to avoid any claims of discrimination with employees. For companies who decide not to offer tiers in the managed cap program, consider the following alternatives:
■ Structure the dollar cap in the Managed Cap program based on a function of the employee’s salary (for example, 50% of the annual base salary)
■ Determine the dollar amount of the Managed Cap program based on the budget the business is willing to absorb for each relocating employee of that job level. For example, executives may be eligible for $75,000; while managers are provided $50,000; experienced professionals are provided $25,000; and entry-level employees are provided $10,000.
2. Another key consideration is how much time employees are spending trying to stretch their relocation dollars to the maximum and limiting their out-of-pocket expenses. Executives and experienced professionals may be distracted from focusing on their jobs due to the level of research required to complete the relocation. However, lower-level employees may not need everything that is offered, and they should be able to relocate within the confines of the dollar cap. For example, we wouldn’t want to see an executive researching household goods costs with outside providers, potentially sacrificing service to limit cost; but an entry-level employee may not need a full shipment, and a truck rental and reimbursement for packing materials may suit him better.
3. Tax gross-up is not recommended to be included in the cap, as the type of services the employee selects (some of which, of course, are imputed as income) will vary with each employee, and the actual taxes owed will fluctuate based on total year income and other demographics. Because taxes cannot be calculated precisely at the time of relocation, two scenarios are likely to arise for every relocating employee by including the tax gross-up in the cap:
• The company will have to collect funds back from employees due to the tax obligation
• The employee is annoyed that they couldn’t utilize more services because their taxes were over estimated
Therefore, to limit these incidences, we recommend that tax gross-up is provided outside of the cap.
4. To avoid any red flags with a Guaranteed Buy Out (GBO) or Buyer Value Option (BVO) program, we recommend that Direct Reimbursement is the only home sale program considered for a managed cap policy. The home sale costs could exceed the cap (either alone or after payment of other relocation assistance), requiring either an exception to policy to cover the amount above the cap or the employee to repay the company the amount of the expenses that exceed the cap. The latter can, essentially, tie the employee to the sale of the home, which would, then, preclude the company from taking advantage of the favorable tax treatment of the home sale expenses.
To conclude, any alternative to traditional relocation programs should be should be evaluated in terms of the company’s culture and their employees benefit needs – this program will not fit all organizations. Lexicon welcomes the opportunity to discuss this type of relocation program with you in further detail and design a policy that best suits our clients and transferring employees.