Flexibility keeps popping up as a hot topic in relocation. We recently wrote about how important it is to millennials, but it’s also important for a relocation policy in general. Striking the right balance of flexibility and controlling costs can be an overwhelming and time consuming process, but one way of finding a solution is by implementing a lump sum policy for U.S. domestic relocations. Lump sums can be used for a variety of purposes, from covering the cost of one or two components of the policy to covering the full relocation. How your company chooses to use the lump sum should be determined by your company culture, employee need and budget considerations.
Many companies find that lump sums play a significant role in rounding off the sharp edges of a traditional relocation policy. So how exactly does a lump sum policy work? Here are the answers to three commonly asked questions about lump sum policies.
1. How is the lump sum calculated?
Some companies choose to utilize the services of an outsourced company who can use their market research to determine an estimated cost of policy provisions. This would be based on certain variables such as family size, distance of the move and timeframes for benefits (such as the number and length of home finding trips and the duration of temporary living).
Other companies simplify the calculation and determine the amount of the lump sum in-house by using historical data. Still others determine the lump sum amount based on the cost the company is willing to absorb. Either way, it’s important to first decide what is important to your company (is it accuracy of amount awarded or total cost?) before choosing an approach.
2. Is the lump sum grossed up for taxes?
Lump sum payments must be imputed as income, and the employee is required to pay taxes on the payment unless the company pays the taxes on the employee’s behalf. The choice to gross-up the expense for taxes is dependent on variables such as:
- Which components the lump sum is intended for
- The amount of the lump sum
- Company culture
In our experience, we see the lump sum grossed-up for taxes more often than not.
3. For which benefits is the lump sum used?
Lump sum payments can be used toward the expenses of all relocation benefits or for certain benefits only, such as temporary living and home finding trips. Companies use lump sums to provide their employees flexibility, to contain costs associated with the relocation, to reduce the amount of exceptions to policy and to relieve the administrative burden of maintaining a policy and catering the policy for employees’ specific needs.
For example, one employee may need temporary living for 90 days but no home finding trips, while another employee prefers to go on two home finding trips but won’t need to utilize much temporary housing. Great news for you and your company – you don’t need to worry about each employee’s specific needs! Each of these employees can use their lump sum payment as they see fit, and the policy doesn’t need to specify how the funds must be used.
The following are some of the most common uses for lump sum payment:
- Home finding trips
- Final move
- Temporary living
- Rental assistance
- Miscellaneous expenses
While some companies choose to include the household goods shipment, storage and real estate assistance in the lump sum, these items may be excludable from income if the company pays these expenses separately. Therefore, it may be more cost effective for the company to provide services and direct reimbursement of these components than to include these benefits in the lump sum.
It’s obvious that lump sum policies not only provide your relocation program with flexibility, but they are equally flexible themselves! If you’ve been struggling with figuring out how to provide your employees with just what they need without burdening yourself with too many pieces to manage, speak to one of our consultants today for an employee relocation program assessment.
Want to know even more about lump sum policies? Check out part two of this post – we discuss which employees should receive lump sums and how to successfully implement these policies while avoiding possible pitfalls.
DISCLAIMER: The manner in which the company treats relocation reimbursement or payments relative to reporting and tax gross-up does not constitute tax advice. Please consult a tax professional.