January 7, 2016

How to Make Lump Sum Programs Work With Your Relocation Policy

For part one of our Lump sum policy post, click here.

If you've read part one of this series on lump sum policies, you know how lump sums can be calculated, if they should be grossed up for taxes and for which benefits they're often used. Now, let's look at who lump sums may be offered to and dive into the most effective ways to make lump sum policies work for your U.S. domestic relocation program.


Who receives lump sums?

Worldwide ERC®’s 2013 Lump Sum Report indicates that 46% of respondents use lump sums to pay for specific components of a relocation policy, while 37% of companies offer a lump sum only policy to all or some of their transferring employees. When companies offer lump sum payments that are intended to cover all costs associated with the relocation, they are most often provided to new hires and recent college graduates (88%) followed by renters (39%), employees who request a lump sum policy (36%) and employees below the manager level (21%)

Further, 54% of companies tier their lump sum only policies according to the following considerations:

  • Job level (Executive/Director/Manager/Non-manager) - 96%
  • Homeowner/renter - 27%
  • Other (including salary, family size and marital status) - 27%
  • Current employee/new hire - 18%

On the other hand, 65% of companies who provide lump sum payments to cover specific components tier the amount based on the following variables:

  • Job level (Executive/Director/Manager/Non-manager) - 68%
  • Homeowner/renter - 49%
  • Current employee/new hire - 34%
  • Family size - 10%
  • Other (including salary in destination and high/low cost areas) - 9%

The lesson is here is to make lump sum work for your program and company culture, whether you're using it for an entire relocation package or as part of it. If you already base your program on job level, it may make sense to do the same with a lump sum policy. If factors such as homeownership or marital status typically influence what type of relocation package an employee receives, factor that into your implementation of a lump sum policy.


How can lump sums be used effectively?

Looking at the tax implications of every part of a lump sum program can help you decide on the most effective way to implement a policy like this. Since certain relocation expenses are excludable from income if the employee meets the IRS qualifications, many companies elect to exclude those components from the lump sum. 

Remember, the lump sum is always imputed as income, and either the company tax assists the payment or the employee nets a lower payment.  By excluding the household goods shipment, 30 days of storage and final move expenses (with the exception of meals and mileage above the excludable rate) from the lump sum and directly reimbursing actual expenses, the company can take advantage of the tax exclusions, while the employee receives the maximum amount of funds to use toward the relocation costs.

If you're thinking about implementing a lump sum policy, it's also important to consider the possible problems. One of the most common disadvantages of lump sum payments is that the employee exhausts the lump sum funds mid-move and struggles to cover the remaining costs needed to complete the relocation.

One way to mitigate these occurrences is to ensure that the amount of the lump sum covers the expenses for which it is intended. Otherwise, it should cover the portion of the anticipated cost that the company is willing to absorb, and you should communicate with transferring employees that they are expected to contribute to the relocation costs. 

Another strategy to prevent employees from expending their lump sum prior to the end of the relocation is to cover the cost to have your relocation management company provide services to help your employees maximize the lump sum. By utilizing this sort of program, the employee spends less time finding suitable options for using the lump sum – a task that can be distracting from the employee’s job. Further, a relocation management company can limit the risk that the employee works with unqualified or dishonest suppliers, potentially increasing cost, time to move and distraction from the job.

If you're unsure whether a lump sum policy is a good idea for your company or if you should adjust an existing lump sum policy to better meet your needs, we'd be happy to discuss it with you! Just click below and fill out the form to let us know that you'd like us to review this with you.

DISCLAIMER: The manner in which the company treats relocation reimbursement or payments relative to reporting and tax gross-up does not constitute tax advice. Please consult a tax professional.


Kristin White

Kristin White

Kristin brings nearly 30 years of experience in global workforce mobility, PR, marketing, editorial planning and communications to her role as a member of the thought leadership and content development teams. Before joining the company in 2020, she worked for many years at Worldwide ERC® in collaboration with cross-departmental teams and industry stakeholders to develop in-person and virtual event programming, digital and print content, and served as editor of Mobility magazine. Contact Kristin at kristin.white@sterlinglexicon.com.

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