Relocation & HR Trends

How to Adjust Employee Relocation Policies to Control Costs

At the end of 2017, Congress passed a new tax law that among other things, slashed the tax excludable status of many employee fringe benefits—effectively making those benefits more expensive. This includes the relocation tax deduction that under the old tax law, made relocation expenses associated with moving for a job, tax excludable. Under the new law, all moving expenses are taxable, and employers would be wise to revisit their relocation policies to see how they can contain relocation spend.

There are a number of different ways employers can do this. Here are 3 ways employers can control relocation expenses in the wake of the 2018 tax reform.

1. Include a Home-Finding Trip in Your Policy

One way to control your company’s relocation expenses is to offer to pay for a home-finding trip in place of other benefits. In the past, many policies offered to cover 3 major benefits: household good moves, final travel, and storage. Under old tax law, all three of these benefits had preferential tax treatment. While household good moves and final destination travel are necessary for almost any move, storage is not always needed. So, some employers have decided to remove storage from their policy, and along with that, any temporary housing benefits. Instead, employers are offering to pay for travel and a few nights at a hotel to find an apartment or house before their employee moves.

By removing these two benefits from the policy and including a home-finding trip instead, it encourages employees to plan ahead as much as possible to ensure they can have their belongings directly delivered to their new apartment or home, and in return employers don’t have to pay for storage or temporary housing.

2. Gross Up On Internal Moves Only

While grossing up will always provide relocating employees with the best moving experience, some companies have decided to gross-up the benefits for internal relocations only. This means any new hires would need to cover the tax liability for their move.

It’s important to note that this depends on the situation. If your company actively recruits someone outside of your location, it would provide a flawed experience for that employee to pay the relocation taxes. You would essentially be asking them to pay a fee to work for your company—when you actively sought them out! However, if someone has applied to your company and identified they are willing to move, not grossing up, could be a way to provide them with a relocation benefit while sharing some of the cost with the new employee.

3. Provide a Home Sell Benefit

While the relocation tax deduction is no longer applicable under new tax law, there are still tax savings associated with a home sell benefit. Because of this, it may be worth considering adding this benefit to your policy, especially for your higher level moves. In order to control relocation costs, you can reallocate the amount of money typically offered to cover moving, travel or temporary housing, and instead, use that same amount to cover closing costs on an employee’s home sell.. This way, your company (and your employee) can capitalize on the tax savings, while still offering a very competitive relocation benefit.

Conclusion

These are all great ways to control costs without fully sacrificing the employee experience. However, there are many other ways to adjust your company’s relocation policy. Check out UrbanBound’s recorded webinar, How to Control Employee Relocation Costs in the Wake of 2018 Tax Reform, to learn more.

UrbanBound is the smartest and easiest way for employers to manage employee relocation benefits online. Through software and policy guidance, UrbanBound has been helping Fortune 500 companies and fast-growing start-ups offer competitive relocation benefits regardless of their size and budget. Plus, robust reporting tools offer unleveled transparency into relocation program performance. UrbanBound is a tech-driven way to provide a seamless relocation experience for all employees.

Over the last few weeks, the headlines have been filled with coverage about the “TaxCuts and Jobs Act” bill. Discussion has focused on issues ranging from the number of tax brackets to the child tax credit and the alternative minimum tax. The final bill is expected to pass this week, and there are a number of impacts to businesses in America—including changes to how relocation benefits are taxed.

Here is what you need to know about how relocation taxes will change.

The Moving Deduction

For the past 20 years, certain moving expenses associated with relocating for a new job have been considered deductible for individuals, given they meet the time and distance tests. These qualifying expenses (household good moves, storage, auto shipments and final travel) have also been considered excludable, if paid for directly by the employer.

Tax Reform 2018: Eliminating the Moving Deduction

The proposed tax bill will eliminate the moving expense deduction (with the exception of military moves) which would make the following moving expenses taxable: household goods moves, storage, auto shipments and final travel. This means there will be significant tax liability for you or your relocating employees starting January 1, 2018.  

As we wait for the final bill to pass, there are a few things you can do to prepare.

Pay Outstanding Relocation Invoices By the End of the Year

If you are currently offering direct bill benefits to take advantage of tax exclusions, we recommend that you pay any outstanding household goods, final travel, in-transit storage and auto-shipment invoices before the end of the year. If the invoice is paid in 2017, it will follow 2017 tax laws, and will be considered excludable. The IRS does not consider services to be a relocation benefit to the employee until the employer pays for the service on the employee’s behalf. That is why any expenses incurred in 2017 but paid in 2018 may be subject to 2018 tax laws.

Decide How to Help In-Progress Relocations

If the tax bill passes, companies will need to reevaluate their current relocation policies, especially ones that only cover current deductible expenses. Because the bill will make formerly deductible relocation expenses taxable, there will be a new tax liability with your relocation policies. You’ll want to start reviewing your policies to decide how you want to handle this tax liability—especially for your ongoing relocations.

Grossing up the tax liability will provide the best experience for your relocating employees. Grossing up means that the company estimates the tax liability and pays the IRS for the estimated amount on behalf of their relocating employee. If the tax bill passes, it will go into effect January 1st, so you will need to decide what to do with employees who are already in the process of relocating. For employees who were expecting to receive a tax deductible benefit, you should strongly consider grossing the tax liability up, in order to avoid unexpected taxes for these individuals.

Revisit Your Current Policies and Reallocate Money to Your Relocation Budget

Just like you need to reevaluate your policies for ongoing relocations, you also want to begin evaluating long term changes to relocation. The first decision you'll need to make will be if you will gross-up or withhold on taxable relocation benefits. As mentioned above, grossing up provides a better experience for the employee. If you're asking employees to relocate and take on all tax liability for their relocation, you may find it harder to attract and retain top talent.

In addition to deciding to gross-up or withhold, you may also revisit your current benefit structure. Many companies have structured policies to maximize tax excludable benefits by offering direct bill. With these benefits becoming taxable, it may be tempting to switch to a lump sum. However, a lump sum offers no insight to employers about how much an employee is spending or on what it is they are spending. With direct bill benefits in place, companies can control costs by paying only for the services the employee uses. It also helps employers budget for future relocation. For employees, direct bill mitigates out-of-pocket costs and connects them with high-quality, vetted service providers.

Looking Ahead: 2018 Tax Reform

In the changing landscape of relocation, empowering companies with the solutions to manage, track, and control relocation costs will become increasingly important. There are many variables that come with this new tax reform, but one thing we know for sure is that technology is only going to become more important for the relocation industry. Remember to keep technology at the top of mind as you prepare for the upcoming changes.

UrbanBound will continue to follow this bill closely and will keep you updated once the final bill is passed. Please continue to check back for more advice on how to prepare for 2018 tax reform.

As of December 2nd, different tax reform bills have passed through the House and the Senate. Lawmakers from both houses plan to work out the differences between the two bills and create one final bill to be passed and signed into law by President Trump before Christmas.

How the Two Tax Bills Address Relocation Benefits

While the two houses come to a compromise, the Joint Committee on Taxation released a list of the similarities and differences between the House and Senate bills. One thing to note as far as relocation goes, is that among the provisions that are the same, is the elimination of the moving deduction, which currently allows an individual who moves for work to deduct moving expenses (given they meet the time and distance test). While moving costs would no longer be a deductible expense for the individual, it is still unclear what this means for employers that provide relocation benefits to their transferring employees, especially ones with direct bill policies for deductible expenses. With Congress’s plans to pass a new bill by the end of the month, it’s likely we’ll have an answer before 2018. UrbanBound will be sure to keep you updated.

In the meantime, significant issues will need to be addressed before the two houses can agree on final bill. Some of those issues are outlined below:

Itemized Deductions: The House Bill seeks to rid many itemized deductions, while the Senate bill, in some cases, seeks to grow them. For example, the House bill repeals the medical expense deduction, while the Senate bill expands it.

Individual Tax Rates: The House Bill cuts the current 7 tax brackets to 4. The Senate Bill keeps the 7 tax brackets, but lowers 6 of the 7 rates. (15% to 12%, 25% to 22%, 28% to 24%, 33% to 32% and 39.5% to 38.5%).

Estate Tax: Currently, there is a 40% tax on inherited assets over $5.49 million. The House Bill immediately doubles the basic exclusion and repeals the tax after 2024. The Senate also doubles the exclusion, but does not repeal the tax.

For a complete list of the similarities and differences you can reference the document released by the Joint Committee on Taxation.