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Consulting Corner: Does Your Lump Sum Policy Need A Check-Up?

A wave of additional focus on lump sums resulted from the 2018 Tax Act.  Companies are still considering the cost and administrative impact of newly taxable benefits such as final move and household goods shipment, and are recalculating allowances in some cases.

26 March 2018

Lump sum relocation policies have gained momentum in recent years.  Whether a company lump sums their whole policy (rarely) or in part (more commonly), a fixed cash allowance that encompasses several benefits is widely perceived as flexible, versatile, cost-effective and administratively simple. 

A wave of additional focus on lump sums resulted from the 2018 Tax Act.  Companies are still considering the cost and administrative impact of newly taxable benefits such as final move and household goods shipment, and are recalculating allowances in some cases.

A RECOMMENDED APPROACH

Bristol has been working with several of our clients to analyze, restructure, and recalculate appropriate lump sums within the context of their overall policy.  Bristol would like to outline a recommended approach with regard to U.S. domestic moves.  It starts with a series of questions:

What benefits do you intend to cover in a lump sum?

According to the 2018 Trippel Survey of Lump Sum Policies, the most commonly covered benefits include:

                                                                                                                                                                                              ©  Trippel Survey & Research, LLC

Bristol suggests that companies carefully consider which benefits may be suitable to lump-sum, and then use an empirical basis to assign dollar amounts to each provision, considering such questions as:

For what level employees?:  It is common for companies to tier lump sums progressively.  For example: Early Career/New Hires on the low end, Managers/Directors in the middle and VPs and above at the high end.

Do we intend to cover each expense in whole or in part?One reason for only going “part way” may be that each individual will have different needs, utilizing more or less of each calculated benefit, and will apportion their overall funds as needed while motivated to carefully contain their own costs.  Or, companies may simply have limited budgets and expect transferees to share in their relocation costs.

Are we including Tax Gross-Up? If so: Full gross-up or partial? What gross up formula?

Most companies will add a tax gross-up amount through payroll in an attempt to deliver a tax protected net amount to the employee.  But not all companies do this, or for each level of employee.  Companies should clearly define and communicate their intentions and possible tax implications so transferees may use their funds wisely.

Should we vary or “tier” the lump sum by distance of move, family size and/or homeowner status?:  These are very common variables for calculating tiered allowances.

Family size is an obvious cost determinant, particularly when considering number of air tickets for final move, or the size of apartment needed for temporary living.

Distance of move comes into play, for example, when considering whether relocation travel involves driving instead of flying.  For companies including household goods shipment (more on this below), self-moves vs. van lines, or a short regional move vs. cross-country will greatly vary the expense.

Homeowners typically need more days in temp housing and for a home finding trip than renters do.  Their miscellaneous household start-up expenses are also typically more extensive than for renters.

Should we include HHG shipment now that the tax exclusion has been repealed?:  In Bristol’s opinion, we still recommend in most cases managing HHG shipment directly through qualified van lines, reimbursing actual costs directly, with customary restrictions.  The benefit may be considered for lump sum – and as of 2018 there is no tax benefit either way - but an average cost can be difficult to calculate due to variables such as distance of the move, homeowner vs. renter, family size, amount of possessions, logistics of the pack and unpack, etc.  With that said, if simplicity is the goal, then an average van line invoice across all moves could be considered (e.g $5-10,000) possibly tiered as described above.

PUTTING IT TOGETHER

A careful consideration of the questions outlined above suggests that an effective lump sum policy can be achieved through a condensed tiered approach, recognizing the specific variables that are most relevant to each company’s predominant transferee demographics.

Case in point:  One Bristol client recently asked us to review and recommend new lump sum allowances based on their average, actual expense reimbursement history for three defined relocation benefits:  Temporary Living, Home Finding Trip and Final Move.  (Their lump sum is partial, in addition to directly-managed services such as home sale and HHG shipment.)

Bristol analyzed 18 months of Temp Living expenses and determined that the average stay in temp housing was under 30 days for renters and over 40 days for homeowners, at an average per night cost of approximately $125 for 1-br/studios and $150 for 2+ bedrooms.  Two of several resulting tiers for the TL portion of the lump sum:

  • Non-executive renter (fam size 1): 21 nights x $125 = $2,625
  • Executive homeowner (fam size 4): 40 nights x $150 = $6,000

Next, looking at airfares for their most commonly traveled routes, hotel costs and meal expenses, we were able to blend all of the data into a new matrix of clearly-defined lump sum allowances by family size, job level (executive vs. non-executive) and distance of the move.

As your Relocation Management Company, Bristol is in a great position to assist you in developing well-researched lump sum recommendations based on external competitive practices and specific to your company’s unique goals and budgets.  Bristol can focus on your actual cities of assignment, typical costs, and your transferees’ utilization history to arrive at custom allowances for you.

We welcome the opportunity to work with you to review and refresh your Lump Sum policies.  If you have any questions, please reach out to your account manager or send us an email at info@bristolglobal.com. 

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