What Keeps Employees From Being Successful With a Lump Sum Policy?
Best practices for calculation, management and distribution of lump sum allowances
Lump sum allowances have been used to assist with relocation expenses for many years. They remain popular for various relocation situations, but what has changed in recent years is how the lump sums are calculated. There are advantages and disadvantages to using a lump sum, the various methods of calculating the amounts and other relocation components that may be covered with a lump sum.
For example, if a company is hiring an employee who is not at the top or the middle of the company ladder, the mobility program may not offer the full suite of relocation benefits to this position level. Instead, the employer may provide a lump sum payment as a solution. But is money enough to meet an employee’s needs?
- When does the employee receive the funds—before, during or after the move?
- Will the money be enough to cover the distance the employee must travel?
- Does the employee have a home to sell?
- Is the employee moving to a high-cost area?
- How is the employee expected to move their belongings?
Advantages and Disadvantages of Lump Sum Allowances
There are advantages and disadvantages to providing a lump sum allowance, whether it is to assist with all or a portion of relocation expenses.
Easier expense administration
and/or budget process
|Extra time or money spent by
the employee when
| Cost control; employees
have flexibility in how funds
are used and retain the balance
|Absence of data when tracking
actual costs and trends
|Reduction in the number of
|Treatment of funds for IRS
purposes when completing year
end income taxes (i.e. final trip
travel, movement of goods and
storage of goods for 30 days)
With the rise of mobility technology, there are many ways of calculating lump sums, providing assistance to the employee as well as tracking relocation expenses.
Calculating the Right Dollar Amount
The amount provided can make the difference between employees being short on funds during the move or having enough extra cash to buy that big screen TV he or she has always wanted. The most common methods for lump sum amount calculation are…
- Fixed amount: Provide a fixed amount that fits the company budget and everyone is treated equally by receiving the same amount. Typically these amounts range from $1,000 to $7,500.
- Defined criteria: Base the amount on defined criteria. The criteria can include one or more of the following: renter or homeowner status, number of family members moving, high cost areas, and the distance between the departure and destination locations. (See Table 1.)
- Distance: Base the amount on a dollar figure (typically $3.50) multiplied by the number of miles traveled according to a reputable internet site. With this calculation the amounts will vary between employees, but those traveling longer distances will receive an amount more equal to the distance he or she must relocate. With this option, companies can often save money depending upon the fixed amount that has been provided. The $3.50 amount is no magic number, however when calculating amounts the total often equates within the $2,000 to $6,000 range.
The amounts and calculation methods can vary depending on company and employee needs and can also be calculated using…
- The company’s cost history
- Company budget
- On-line website for estimated costs for hotels, airfare and rental car
- U.S. General Service Administration (GSA) per diem rates
Whether calculating the lump sum by criteria or the number of miles traveled, both methods can have minimum and maximum amounts applied. (See Table 2.)
Table 1: Based on criteria with $10,000 maximum
Table 2: Based on mileage distance with a $500 minimum and $6,000 maximum
Providing More Than Financial Assistance
Many employees receiving lump sum allowances may be relocating for the first time. Of those employees who prefer to move without any assistance, there are just as many who appreciate having someone to guide them through the relocation process. Receiving a lump sum does not mean employees must be on their own, companies can support employees with:
- Access to a website portal that offers relocation guides, recommended moving options and discounts
- Assistance and/or guidance through a relocation consultant
Household Goods Shipping
Some employees may choose to self-move in their own vehicle. But others may still require some type of truck or trailer, or assistance through a van line. This can be provided as part of the lump sum or as an additional benefit to the lump sum allowance.
If employee demographics show a mover may be required, consider a benefit separate from the lump sum as the cost for the movement of household goods is a tax excludable event if the employee meets the IRS criteria for relocation. The company can avoid unnecessary gross-up costs by leveraging their existing relationship with a van line or portable moving and storage provider and adding these services to the lump sum policy.
Specific Relocation Benefits
Sometimes lump sums are provided to assist with a home finding trip and/or temporary housing expenses. For a home finding trip, these expenses typically include transportation, lodging and meals and for temporary housing it typically includes lodging, rental car and transportation for return trips home to the departure location. If moving to a high cost location the amount is typically increased to meet the higher costs incurred in those areas.
A lump sum allowance may be provided within the employee’s payroll check, wired to their banking account or provided on a declining balance debit card. A declining balance credit card is an ideal way for employees to manage relocation funds by keeping them separate from their own money.
For new hires, a card can be issued before employees are on the company payroll, which can be a financial relief to those needing funds before they move. In addition, both you and the employee can see how the funds are being used through reporting capabilities. This transparency allows you to track expenses and define trends on how relocation funds are being used.
With all the choices and services related to a lump sum allowance, it is a decision that must be weighed carefully and be reviewed on a yearly basis. Often the company culture and relocation budget helps determine if a lump sum is right for your mobility program. If pursuing a lump sum benchmark, be specific on what the allowance is intended to cover, employee demographics, HR goals, and of course the relocation budget.
Note: During the policy consultation process SIRVA may provide information about tax and legal issues. Please be aware that tax and/or legal information is not the same as tax or legal advice. SIRVA and SIRVA employees cannot and will not give tax or legal advice and SIRVA recommends that any tax and/or legal aspects of any policy be reviewed by your own tax and legal experts.