We see it all the time: a company (often a smaller or start-up organization) reaches out to TRC because they have found the perfect employee candidate. The only problem is that the candidate lives on the other side of the country and there is no existing employee relocation program.
Fortunately, this candidate is willing to relocate, but she knows that it is expensive, and she has asked what kind of employee relocation package the company will provide. The company has never been involved with a domestic relocation before and is not quite sure what to do. She is a must-have candidate and she knows it, so she has considerable bargaining power.
Option One: Lump Sum
The quickest and simplest remedy for the company would be to offer the candidate a lump sum payment. The amount of the lump sum could be part of the compensation negotiations. Lump sums can be a particularly effective solution for a less-established new employee without a home to sell or many possessions to move.
These employees also tend to be more comfortable with managing the process on their own and spending the lump sum as they see fit. In fact, this flexibility makes them view the benefit even more positively. The lump sum is intended to defray the employee’s relocation costs, not to cover them completely. Employees do not always realize this, so it is important to be clear.
The drawback here is that while you are offering financial assistance to reduce the cost of the move, you are not offering any direction or assistance with the process. This new employee would be on her own to plan the move, source suppliers and manage the process at the departure and destination ends.
For companies that do not have internal employee relocation expertise or work with a relocation management company, a lump sum makes the process a simple financial transaction. Companies usually do not ask for receipts—ease of administration is a key benefit—and they do not attempt to direct the process. (Companies with in-house expertise or those working with a relocation management company increasingly offer more support and direction to the lump sum employee, such as real estate referrals and online destination information tools.)
Option Two: Direct Reimbursement
For an established professional like our example candidate, direct reimbursement of relocation costs as she incurs them could be a more satisfactory approach. She would need to keep careful track of relocation expenses, keeping them separate from normal business expenses, and submitting relocation expense reports and receipts according to the company’s guidelines.
The company would need to define which relocation expenses are eligible for reimbursement and consider setting limits on each expense area as applicable, if the company wishes to manage its total relocation benefit to a cap. Again, this can be part of the compensation negotiations with the candidate. The cost of direct reimbursement for an executive who is selling an expensive home and purchasing a new one can be considerable. However, this investment might make the difference in signing a must-have employee.
Direct reimbursement can have the same drawbacks as a lump sum. For a company without in-house relocation expertise or a relocation management company to help, our example candidate would be on her own to plan and execute the move. For a more senior level employee, especially a single one, this can be a considerable distraction. It can also be costly for the company, as the company is reimbursing retail-price charges for services as the employee incurs them. The company does not benefit from negotiated discounts on household goods transportation and other services that relocation management companies can pass along to clients.
Option Three: Combination of Direct Reimbursement and a Lump Sum
A combined approach could offer our example candidate the security of knowing that she will have full coverage for the most important benefits, plus a set amount of money to choose the ancillary benefits that are most useful for her particular relocation situation.
Under this methodology, the company typically would cover the household goods shipment, homesale closing cost assistance and temporary housing via direct reimbursement. Companies determine in advance if they intend to cap the budget for each individual benefit or if they will provide direct reimbursement at actual cost.
What is Included in a Domestic Relocation Package?
A domestic employee relocation package usually includes:
- Home marketing assistance or a full homesale program. For renters, lease break assistance.
- Referrals to real estate agents at the departure and destination locations.
- A house-hunting trip to the destination location, including transportation, lodging and meals.
- Home finding or rental finding assistance at the destination, including an area tour.
- Reimbursement of real estate closing costs.
- Household goods transportation, including packing (and sometimes unpacking) service and full replacement value insurance coverage.
- Temporary housing at the destination, if needed.
- Final move expenses, including transportation, lodging and meals.
- Miscellaneous moving expenses, such as utility connections, car registration, etc. (Companies often issue a miscellaneous allowance, to be used as desired.)
- Tax assistance (gross-up)
In a direct reimbursement program, these items typically would be allowable and reimbursable relocation expenses. They would also be part of most traditional tiered programs.
Relocation Tax Considerations
In general, the IRS considers most forms of employer-provided relocation assistance to be taxable compensation to the employee. It is imperative that employers familiarize themselves with current IRS regulations and determine how they will handle the tax aspects of their global mobility program before offering any benefits to relocating employees.
Current best practice is for the company to tax assist or ‘gross-up’ for the taxes, to eliminate any added financial burden for their employees. This tax gross-up is a significant cost for the company, and it needs to be included in the overall relocation budget. For more information regarding tax issues related to mobility programs, please see TRC’s ebook, The 2017 Tax Cuts and Jobs Act.
Developing a Relocation Policy
Any domestic relocation program should have written policies clearly spelling out the eligibility, available benefits, terms and conditions. This is important for the company and the employee alike, as it fosters consistency and equity.
It is important to define what is included in your employee relocation package, and what is included in each individual service within the package, such as household goods transportation.