The Downside to Lump Sums: Easier for the Company, Harder for the Employee
3.1.19 | When the 2018 Federal Tax changes made household goods and final move expenses taxable, many mobility departments considered implementing lump sum programs. By giving relocating employees one lump sum payment to cover all moving-related costs, companies assume they can enjoy budget control, a simple gross-up process, and a lot less work.
However, easy is not always best.
Consider the relocating employee, the transferee. He or she is about to take on a new role, perhaps with a new company, while relocating – often with a family in tow. Changing jobs and moving are two of the more stressful situations in life. When they happen at once, it can feel overwhelming.
An Employee’s Perspective
- You don’t know what you don’t know. Most families are not familiar with the moving process and everything it entails. Choosing vendors and coordinating them is a job in itself. Relocation tends to be more complicated and time consuming than transferees realize. It can be a significant distraction for an employee who is trying to focus on a new role.
- Will there be enough money? Just as transferees are often unfamiliar with the relocation process, they’re also unfamiliar with its costs. Employers do their best to forecast moving-related expenses, but sometimes employees have to draw from their own resources.
- First impressions. Employers want to make a great first impression and employees do, too. A difficult relocation process can compromise an employer’s image and a distracted employee is ill-positioned to put their best foot forward.
Grossing up a lump sum seems like a straightforward process. However, by taking this simpler route, employers may unwittingly bypass cost-saving opportunities for themselves and their employees.
A Financial Perspective
- Unnecessary gross-up. When issuing a lump sum, the organization pays a flat gross-up percentage based on either supplemental or marginal rates. However, when employers follow a policy and separate relocation expenses, they have the potential to save on gross-up costs for moves into states that do not follow the federal tax law on household goods and final move expenses.
- Missed savings. When transferees individually choose their vendors, they do not benefit from the economies of scale. Companies with a high volume of relocations effectively leverage lower costs from van lines and other moving-related service providers.
If a lump sum policy doesn’t align with your company goals, consider these options:
- Gross-Up Hybrid: Just like any hybrid, this method marries the best of both worlds. Transferees are reimbursed for part of their relocation expenses while a lump sum covers the remainder. For example, many employers will reimburse for household goods and use a lump sum to cover the other expenses, allowing the employer to take advantage of the cost savings on gross-up.
- Managed Cap: As technology has improved in the relocation space, organizations can allow transferees to manage their own relocation – but within limits. Under the managed cap program, transferees follow a policy that entails a list of approved benefits with a not-to-exceed dollar amount. This allows the transferee to be managed, with direction from vendors, while relocation spend is capped. With a managed cap, any money not spent during the relocation process goes back to the corporation. This empowers the transferee to use the benefits they want and need, and allows the corporation to save by managing the expenses and gross-up calculations.
Yes, lump sums can be easy to manage internally, but when you consider the potential ramifications, it gets a bit complicated and may add significant cost to a program. Before you adopt a lump-sum-only program, make sure you review not only how the change affects your internal process but, more importantly, how it impacts the relocating employee.