Arguably, one of the biggest trends among the relocation industry over the past decade has been the use of lump sums. Especially following the recession, during which many companies minimized their HR departments and relocation packages, lump sums emerged as a much simpler way to provide relocation benefits.
While initially more of a cost-saving measure, lump sums have evolved as a common fixture in relocation policies that serve both the needs of the transferee and the company.
What are lump sums? What benefits do they offer companies?
Lump sum programs provide employees a fixed amount of money to use for their move at their discretion. Often, companies will consider factors such as the position or seniority to create tiers for the amount being offered.
This approach has several key benefits to HR professionals who likely don’t have the bandwidth to manage multiple employee relocations.
- Simplicity: Without question, this is the main reason companies adopt lump sum programs. Instead of aligning employees with different relocation providers and reviewing exception requests, at a minimum, all a company needs to do is provide employees with their designated dollar amount.
- Consistency: Even though each employee can spend their money however they see fit, lump sums ensure each employee is given the same relocation benefit. This helps reduce perceptions of favoritism among employees stemming from varying relocation benefits or exception requests.
- Budgeting: By giving all your employees the same amount for their relocation, it is much easier to estimate cost projections for upcoming expansion or relocation initiatives.
Concerns of Lump Sums
Based on what you’ve read so far, lump sums might seem like a panacea for any and all relocation needs. While they do provide a number of benefits to companies, lump sums leave employees to answer all the questions related to their move. For those employees who’ve moved a number of times, this might be no big deal. But for those who are unseasoned in what moving entails, it could leave them subject to some difficult situations.
Even the most straightforward moves come with questions that some employees may not be able to answer, such as “how much does a reputable mover cost?” Some new hires might be inclined to find the cheapest mover available, which puts them at considerable risk of hiring rogue movers.
What often happens is people try to spend as little as possible in the early part of the move, where there might be things that merit a significant portion of their lump sum. At the very least, you should provide your employees with a cost breakdown of common moving expenses. It’s important to update these annually to reflect current market costs so employees know how they should allocate their lump sum, helping avoid situations that could adversely affect their onboarding process.
Lump Sums and the 2018 Tax Reform
Prior to 2018, there were a number of tax considerations around lump sums. For example, employers often would provide basic relocation services like moving and storage, which were tax-excludable, and then provide a lump sum for all taxable expenses. However, because the 2018 tax reform eliminated all move-related deductions except for military personnel, many companies have had to re-evaluate their entire relocation policy.
As mentioned above, businesses often could yield significant tax benefits by covering the costs of tax-excludable expenses. But with that strategy obsolete, even more companies have shifted to lump sum programs as a way to offer employees relocation assistance without devoting extra resources toward managing the details of employees’ moves.
Grossing Up Employees’ Lump Sums
Even without the tax deductions, there still remains one major tax consideration for businesses offering lump sums: how it impacts an employee’s tax burden, especially if it moves them into a higher tax bracket.
Depending on an employee’s tax bracket, they will see a sizable amount removed before they can spend money on their move. Some companies compensate for this by offering a gross-up on lump sum payments, where they increase the base payment so that the after-tax amount nets out to the originally stated amount. For example, if your company provides a $10,000 lump sum, a proper gross-up would be to add $2,800 for someone with a 28% tax rate, so they receive $10,000 after taxes.
At first glance, this might seem like a significant increase to your organization’s relocation expenses, but the 2018 tax reform gave businesses a number of tax benefits in other areas that more than makeup for the added cost of grossing up lump sums.
Lump sums give employees more flexibility regarding their relocation while freeing up organizations from managing multiple relocations. But if your company has decided to take the lump sum approach, you need to have a strategy in place to make sure you’re doing so effectively and efficiently.
It is critical to educate your employees on how to manage their lump sum. This will help ensure that each employee has a relocation process free from any unexpected and unpleasant pitfalls and ready to start their new position off on the right foot!