29 May, 2018 Is a Lump Sum Program Right For Your Organization?
As an alternative to a policy-driven approach, companies are utilizing lump sum relocation assistance programs for some, or all, of their relocating employees. While evaluating whether this type of program makes sense for any organization, it is important to consider all the attributable factors that may impact the organization and its employees.
Lump sum programs are designed to:
- Provide employees with a single payment at the start of the relocation to cover expenses
- Empower employees to use the funds to best suit their relocation needs and circumstances
- Allow unused funds to be kept by the employee
While lump sum programs are simple and easy to administer, there are inherent complexities or characteristics that may create issues for the organization, the relocating employee, and/or their family. Relocation Coordinates International (RCI) encourages clients to carefully assess the following scenarios:
- What is the company’s culture? Do you want to a program that will provide employees support beyond just funds or should it be up to the employee to make the transition?
- Is it important that the employee’s experience be positive and with little stress?
- Are employees expected to be productive in their new job while relocating at the same time?
- When employees encounter issues or challenges, are they expected to deal with problem resolution on their own? Or is there someone designated to assist them?
- Do executive employees expect a policy driven approach based on previous relocation experiences with former employers?
- Will this program affect your ability to attract key talent?
- What is the financial impact on the employee? (overpayment for some, underpayment for others)
Advantages of a Lump Sum Program
Initially, lump sum programs were developed for entry level and recent college graduates hires. These relocations tend to be simple and inexpensive. Thus, lump sum programs are most efficient.
As more companies are considering lump sum programs, we find that some are not interested in setting up direct billing arrangement with service providers and auditing employee expense reports. With the trend on the rise, lump sum programs offer employees full flexibility to use the funds at their discretion, including on non-relocation related expenses.
Disadvantages of a Lump Sum Program
While lump sum programs are quick and easy, their drawbacks have unique disadvantages for both the company and employee. Offering such a program usually means that employees are expected to plan and manage their own relocation. This task can daunting, especially if an employee has never relocated before or does not know what to expect, such as the costs associated with the shipment of household goods or temporary housing in the new location. The probability that transferees may exceed their budget and not anticipate ancillary expenses is extremely likely and problematic. Some of primary disadvantages include:
- Inability of employee to properly budget relocation and anticipate out-of-pocket costs
- Decrease in job productivity due to managing all aspects of relocation and new job acclimation
- Risk of employees utilizing vendors that are not vetted and lack of advocacy when issues arise
- Lack of support by experienced relocation consultant to identify cost containment strategies and provide access to vetted providers with discounted pricing
- Employee may not be able to locate moving company during summer months that will accept c.o.d. payment. (Corporate direct-billed agreements take priority since capacity is extremely limited)
- Inability for company to track relocation spend
Criteria to Determine Lump Sum Amount
There are many options to help companies determine the amount of the lump sum payment each relocating employee will receive. The amount is computed based on one or more of the criteria below:
- Job or grade level of the employee
- Homeowner or renter status
- New hire versus current employee
- Historical averages for similar move types
- Distance of relocation and family size
- Discretion of the employee’s manager
- Third-party relocation firm cost estimate or portion thereof
Due to the 2018 Tax Cut and Jobs Act, relocation expenses no longer have the tax savings they once did. This means that managed approach programs have limited benefits for the company and the employee.
Today, lump sum payments will either be taxed or grossed-up. If the payment is grossed-up, there are two methods to consider. The Flat Method which grosses up the taxes. While the Inverse Method grosses up the taxes, as well as the gross up itself. The latter method is the more expensive method, but it offers the employee greater tax protection.
Whether a company decides to provide a lump sum or policy approach to their relocating employees, ultimately it is important that program objectives and goals are met. It is our recommendation that the following measures to be incorporated into any lump sum program:
- A consistent policy which details the factor(s) for determining the amount, tax treatment and when it will be paid to the employee.
- Engage a relocation management firm to provide limited but important services to achieve a positive employee experience, such as:
- Counseling on the relocation process, special needs assistance and problem resolution
- Access to vetted service providers and discounted fees
- Support throughout the process
- Access to Affinity Programs that provide significant real estate closing cost rebates