The State of the Lump Sum: What Are Employers Doing?
In light of tax reform, lump sum policies may appear more attractive again to employers.
Since the Tax Cuts and Jobs Act (TCJA) took effect January 1, moving expenses (for the most part) are no longer tax deductible. This means that employers who gross up relocation costs must further pad their budgets to cushion workers from personal tax liabilities.
The TCJA was voted into law so quickly that most corporate relocation teams did not have enough time to properly adjust their programs and policies to the new situation. A lot of companies took the approach of continuing business as usual for 2018 and reviewed possible changes for 2019 and beyond.
The expectation in early 2018 was, and still is at this time, that more programs are going to change from providing full relocations to providing lump sums (possibly in combination with providing the household goods move as one additional benefit).
The thought is that lump sums make it easier to control costs and predict an employee’s tax burden.
The lump sum approach has its selling points, but reasons remain as to why employers haven’t always bought into it. Here are the main considerations:
- Easier to administer the program and more control over relocation expenses.
- Simplified gross-up calculations, reducing the chance for year-end deltas.
- More flexibility for the transferee to manage the relocation to their specific preferences.
- Transferees may end up with a financial benefit.
- The burden is on the transferees to manage the relocation.
- Transferees may, due to a lack of experience or in an effort to save money, make the wrong decisions jeopardizing the relocation, and cause issues for the corporate relocation team.
- Transferees may end up paying out-of-pocket for relocation expenses if the lump sum does not cover all expenses.
- Employers may lose the benefits of the economies of scale, have less buying power, and potentially increase costs while reducing service levels.
- The loss of quality control may negatively impact the transferee experience and in turn reflect negatively on the corporate relocation department.
How Many Employers Use It?
To better understand the predominance of lump sum policies, we surveyed more than 150 global mobility leaders who represent companies of different sizes, industries, and geographies.
Almost two-thirds of respondents said they use some type of lump sum policy and one-third said they have no lump sum policy at all. Due to regulatory limitations, some organizations do not have the option to choose such a policy.
How Is It Used and How Often?
Survey respondents use lump sums in a variety of ways. For example, one employer may offer a lump sum for all relocation costs and another may use lump sums in combination with the household goods move. For some employers, lump sums are only 5 percent of their total number of relocations; for others, it is 90 percent.
The variance is so significant that we divided employers into two categories: 1) Programs with 50% or more lump sum relocations and 2) Programs with less than 50% lump sum relocation. The split was almost even.
As mobility professionals navigate the post-tax-reform landscape, they are more likely to consider the lump sum route. Some employers may completely convert to lump sum relocation packages while others may simply expand the use of lump sums within their current program. Regardless, mobility departments will continue to be challenged with balancing budget and benefits to make the best decision for their company.
Want to know how the new tax law impacted your program? Contact our experts.