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Essential Knowledge:
The Key to a Good Year End - Part I |
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The end is near….. year end that is. That means it’s time for final pay runs, total year cost reporting and W-2s, delta calculations and tax returns. If your year end is looking chaotic, now is the time to put plans in place to avoid that chaos next year.
An effective and comprehensive relocation benefits program is designed by all the internal stakeholders and is aligned to the overall strategic objectives of the organization. Collaboration between Human Resources, Payroll, Tax and Accounting will allow discussion about each area’s role in a successful program and how each group’s specific needs will be met...all leading to a seamless and successful year-end process.
At the outset, the framework for devising a relocation program will take into consideration the demographics of the organization’s transferee base along with company culture and characteristics. Once the overall benefits matrix is determined, specific policies and programs can be established. Since most relocation benefits are considered taxable income to the transferee, companies often offer tax assistance (gross-up) to help in offsetting the tax burden to its transferring employees. Tax assistance is a benefit. It is not mandatory; and therefore, has no prescribed method that must be utilized. Consistency, though, is the key to all gross-up decisions.
Tax Treatment of Relocation Expenses
The Revenue Reconciliation Act of 1993 states that for relocations that meet the definition requirements (i.e. fifty mile rule, 39 week test, etc.), all relocation expenses reimbursed by an employer to or on behalf of an employee are considered taxable income with the exception of: the transportation of household goods and personal items, the first thirty days of household goods in-transit storage; and final move travel expenses. It is up to the company to decide if it will provide tax assistance on some or all of the remaining relocation expenses.
Some companies choose to save gross up dollars on specific items as long as it is consistent with the intent of the relocation program and business objectives. These may include: loss on sale, points paid on home purchase closings, miscellaneous/lump sum allowances and duplicate housing benefits. Since points paid on home purchase closings and mortgage interest are deductible to the transferee, companies often do not provide tax assistance as this would lead to overcompensation. It is important to remember that for non-deductible expenses, it is necessary for the payroll to withhold taxes and pay payroll taxes at the time of reimbursement. Therefore if no tax assistance is allocated for the non-deductible expenses, the transferee will receive the net reimbursement after withholdings. Regardless of the decisions, it is necessary to clearly define and communicate the tax treatment with transferees.
Tax Assistance Calculation Methodology
Once the benefits and taxable treatment of relocation expenses have been determined, the next decision is the methodology for calculating tax assistance. As there is no prescribed treatment of taxable relocation expenses, there is no set formula for calculating tax assistance. The actual tax impact from a relocation varies depending upon each transferee’s personal tax situation. Methodology decisions are influenced by the demographics of the transferee population along with relocation program objectives.
There are several different rates/methods from which to choose. The following table lists the most commonly used methods and their advantages and disadvantages.
In addition to determining the methodology, the company has the opportunity to make several key decisions affecting tax assistance, including which income variables to use as a basis for the gross-up; company salary or total household income; and, which taxes to include in tax assistance (Federal, State, Local, FICA and Medicare).
While there may be more than one tax methodology implemented within a relocation program, it is critical to clearly identify and consistently apply the basis for assigning each transferee with which tax policy. The simplest practice in a tiered relocation program is to align each relocation policy to a tax methodology. Another important element is to ensure the tax assistance benefit and the tax basis are fully understood by transferees.
Relocation Expense Processing
The decisions on tax treatment and tax assistance methodology are the framework for the processing of relocation expenses. Successful processing is dependent upon clear communication and consistent execution to minimize inconvenience to transferees while managing the company’s expenses.
Audit Relocation Expenses
A review of each expense is conducted to ensure compliance with the relocation program. It is submitted by the transferee or provider for review in the following areas:
· Policy
· Arithmetic · Documentation
· Federal Acquisition or Joint Travel Regulations
· Reasonableness
The differential between submitted expenses and those approved for reimbursement is a valuable tool for reviewing policy effectiveness. As exceptions to policy are approved and tracked, trends become apparent. Trends may indicate there is a need to revise or better define policy benefits in line with market changes. It is helpful to establish the company’s strictness to policy adherence ahead of time to avoid delays in reimbursing transferees or providers as well as reduce administrative work.
Track Relocation Expenses
Each expense is entered into a database and is assigned a code specific to its benefits category and tax treatment. This element establishes how the expense will be processed for reimbursement, tax treatment and tax assistance. It will also affect cost reporting, trending and policy and financial decisions.
Reimburse Relocation Expenses
Reimbursement is conducted according to the company’s funding and disbursement practice. Decisions for this component are balanced between the transferee’s or provider’s needs along with the funding mechanism and established frequencies. Proactive budgeting and regular accrual of relocation expenses helps ensure the availability of funds.
Calculate Tax Assistance
Tax assistance is calculated as per the selected methodology at pre-established frequencies. The time intervals are typically based on volume, pay run dates and/or availability of payroll resources. At the appointed time, the calculations are made and entered into the payroll system, either through manual data entry or from an electronic feed. Depending on payroll system limitations, expenses not receiving tax assistance may need to be handled differently or outside of a pre-established cycle.
Calculate Year End Tax Assistance
Depending on the methodology previously selected, the company may decide as part of its tax policy to perform a year end gross up analysis. From that analysis, an adjustment can be made to tax assistance amounts previously processed, either up or down to more closely match the transferee’s tax situation at the end of the calendar year. The methodology most commonly adopted for year end calculations is the Tax Return method.
However, in order to process any year end adjustments timely to be included in the current tax year, it is necessary to establish a cut off date for expenses. This means that providers and transferees have until a certain date to send in relocation expenses/invoices in order to be processed that year. Anything beyond that date will be processed in January of the following year. There is obviously a sensitive balance to making sure the transferees or providers are not out large sums of money for an extended amount of time while maintaining the sanity of the company’s payroll team with year-end responsibilities.
Report Relocation Expenses
The data collected from the processing of relocation expenses is a large factor in reviewing the performance of a relocation program. Each team affected by relocation within a company is interested in different data points. For example, Human Resources may want to compare relocation program costs by policy levels; Accounting may want to adjust the budgeting basis by cost center; Payroll may want to examine tax assistance amounts by tax brackets. Reports on relocation expenses; therefore, need to be readily accessible in various sorting, grouping options and file formats in order to meet everyone’s needs.
Support for Relocation Expense Management
The success of a relocation expense program is dependent upon clear communication and consistent application. Some of the functions can be performed within the company or outsourced. Regardless of who is performing each component, it is important to maintain clarity on the interpretation of the relocation policy and its accompanying tax policy amongst all involved parties.
Each transferee needs to know how relocation expenses will be submitted, audited, reimbursed and the tax treatment and tax assistance methodology. VISION Relocation Group’s Counselors understand that while many transferees in today’s corporate world have relocated at least once before, there are many who may be experiencing relocation for the first time. The Counselors proactively counsel transferees in managing their relocation dollars while adhering to the policy parameters to monitor the client’s cash outlay.
The Human Resource and Payroll teams receive consulting on best practices to meet their business objectives. VISION Relocation Group’s team of experienced relocation professionals have helped navigate hundreds of clients and transferees through the myriad of policy development and tax policy options. VISION’s consultative approach makes us a leader in providing customized solutions that address each group’s individual goals and objectives. Especially for an area such as Relocation Expense
Management, VISION’s strength is in communicating and coordinating between the various parties that are involved.
VISION’s comprehensive relocation systems provide flexible and comprehensive support scalable to each client’s needs. Of particular mention are the reporting options available to clients. A full accounting of relocation expenses can be prepared in formats flexible to accommodate various sorting or grouping needs. The Account Management team reviews and shares not only the data but recommendations for each client to remain competitive in its relocation program in order to meet changing company, industry or market conditions.
How VISION Can Help Your VISION Consulting Services team focuses exclusively on researching, analyzing and advising on the latest trends in global relocation and human resources. Questions? Dilemmas? Contact us today for a complete review of your current relocation policies. We’ll apply our Better Practices to your unique relocation needs and budget and ensure you’re prepared for success in a challenging market.
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