Employee Relocation Packages

Are Home Sale Benefits Collectible From Transferees Under a Payback Agreement?

Wednesday, February 18, 2009 by hank roth

Even before the current economic crisis, a majority of companies required transferees to sign repayment agreements, under which the employee agrees to repay relocation benefits if they leave the company within some specified period after being transferred.

Such agreements commonly include a requirement to repay costs that were incurred by the employer to acquire and dispose of the employee’s home in the departure location under a home purchase program. Such costs are usually the largest part of the expenses incurred to move the employee.
If a home purchase program is properly organized and implemented, IRS agrees that costs incurred are not taxable to the employee. See Rev. Rul. 2005-74. However, employers sometimes express concern that inclusion of those costs in a repayment agreement is somehow inconsistent with the original exclusion of the costs from income.

That concern is not well-founded.

A repayment agreement simply imposes a condition on the employer’s willingness to undertake the expense of moving the employee. It does not operate to characterize any of the expenses as employee benefits, either taxable or not taxable. The company incurred many costs to move the employee, some taxable and some not (for example, moving household goods). Under the repayment agreement the employee simply acknowledges that the employer expects a return on its investment in moving the employee. The benefit to the employer of incurring the costs will not be realized if the employee accepts relocation but then leaves employment within a short period of time.

Requiring the employee to repay such costs does not in any way suggest or imply that the costs were incurred to benefit the employee. Indeed, as discussed in the previous paragraph, it tends to suggest just the opposite.

Moreover, when the employee does repay the home sale costs, the employee in effect has simply paid his or her own costs of home sale. There is no benefit to the employee at all, taxable or nontaxable.

Consequently, including home sale costs in a repayment agreement should not be taken as suggesting that such costs were a taxable employee benefit in the first instance.

However, as with all other costs included in a repayment agreement, the agreement should clearly specify the categories of cost that are subject to the agreement. Doing so will help the company to enforce the agreement, if that becomes necessary.

Reprinted from the Worldwide ERC Tax and Legal Mastersource with permission. Article prepared by Peter K. Scott, ERC Tax Counsel.

Employer-provided Relocation Loans

Wednesday, January 21, 2009 by hank roth

In today’s precarious economy, many employers are considering giving relocation loans to employees. Several of these employers may not have provided relocation loans to employees before, but are now looking for ways to increase the opportunity to make such loans available. .

A relocation loan that is done correctly can be offered to the employee interest-free and without exposure to creating imputed interest to the employee which would be treated by the Internal Revenue Service as compensation income.

The following information concerning below market rate loans is an excerpt from an article published by the Worldwide Employee Relocation Council® (ERC) in its Tax and Legal MasterSource:

A. Types of relocation loans

1. Mortgage loans

A mortgage loan is extended by the employer to the employee with the understanding that the employee will use the proceeds of the loan to purchase a new principal residence. Such loan may be a demand or term loan, and is conditioned on the future performance of substantial services for the employer. The loan may have a market interest rate, a below market interest rate, or no interest at all.

2. Equity bridge loans

A loan may be offered to an employee in order to enable the employee to receive the equity out of an old unsold residence to make the down payment on a new residence. The terms of the loan may require that the proceeds be repaid within a short time after the sale of the former residence. The loan may have a market interest rate, or a below market interest rate, or no interest at all.

B. Imputation of interest on a loan transaction

1. Explanation of imputed interest

When a loan is made at a below market interest rate, or with no interest at all, the Internal Revenue Code may impute interest to the loan even though the lender and borrower never did. If imputed interest rules apply to an employee relocation loan, the amount by which a market rate of interest exceeds the loan’s actual rate of interest is considered income to the employee borrower. (The market rate used is the "applicable federal rate," which is computed by the IRS under a formula in the Internal Revenue Code and periodically adjusted.) This income is considered to be derived from the employer-lender, because the employer-lender is considered to have paid interest on the loan to itself on behalf of the employee-borrower.

2. An example of imputed interest

An example of imputed interest may be helpful in understanding this complex area. Assume that the employer has made an interest-free bridge loan to the employee. The market rate of interest on the loan would be $100 per month if interest were charged by the employer-lender. No interest is paid by the employee-borrower or received by the employer-lender. However, the tax law considers the employee-borrower to have owed $100 of interest, and since the employee’s obligation to pay this $100 was satisfied by the employer-lender, the transaction is treated as though the employer-lender paid $100 per month to the employee-borrower, who then repaid it to the employer-lender. This characterization of the transaction gives rise to $100 per month of compensation income to the employee-borrower.

3. Reporting requirements for imputed interest

The employee-borrower must report imputed income on his/her tax return, even though the employee never received it, but then may be entitled to a corresponding deduction for the interest theoretically paid on the employee’s behalf by the employer-lender.

4. Negative tax consequences of imputed interest

If interest is imputed to loans it has negative tax consequences for the employer-lender and may have for the employee-borrower. The employer-lender must pay payroll taxes (FICA, RRTA, and FUTA) on the amounts imputed as interest income to the employee-borrower. (The employer-lender, however, does not have to withhold federal income taxes on the imputed interest income.) The employee-borrower may or may not be eligible for a deduction of the imputed interest. The interest on a mortgage or bridge loan may be deductible as "qualified residence interest" under the general rules applicable to homeowners. However, there may be situations in which interest income is imputed to the employee, but the employee is unable to take a corresponding interest deduction. For example, there is a $100,000 limit on the amount of home equity debt upon which interest is deductible.

C. Avoidance of imputed interest

1. De minimis exception

If the total principal amount of the employer’s mortgage loan, bridge loan, or both outstanding to the employee does not exceed $10,000 during the year, the loans are ex-empted from the imputed interest rules due to their small size. No interest will be imputed in this situation.

2. Exemption for employee relocation loans under regulation 1.7872-5T

Under a temporary regulation, imputed interest will not apply to compensation-related mortgage or bridge loans if the following requirements are met:

a. Exemption for mortgage loans

The loan agreement must require the following provisions:

i. The proceeds of the loan must be used only to purchase the new residence.

ii. Such loans must be secured by a mortgage on the new principal residence acquired in connection with the relocation of the employee to a new principal place of work.

iii. The loan must be a demand or term loan.

iv. The benefits of the interest arrangements must not be transferable.

v. The below market interest rate (or the lack of interest) must be conditioned on the future performance of substantial services by the employee.

vi. The employee must certify to the employer that the employee reasonably expects to itemize deductions for each year the loan is outstanding.

b. Exemption for bridge loans

The terms of the bridge loan must meet all the requirements for the mortgage loan as stated above except for the security requirement. Note, however, that any interest actually charged on a bridge loan will not be deductible by the transferee unless the loan is secured by either the old or new residence. In addition, the bridge loan agreement must provide that the loan is payable in full within 15 days after the sale of the employee’s immediately former principal residence. The aggregate of the principal amount of all outstanding bridge loans must not be greater than the employer’s reasonable estimate of the equity in the former residence. The former residence must not be converted to business or investment use.

c. An unresolved issue

One issue that remains unresolved under the temporary regulation is whether the exemption applies in situations where imputed interest would not be deductible under the general rules applicable to home mortgage loan interest deductions. This problem is particularly acute for bridge loans, which are often unsecured by either the old or new residence, and, even if secured by the old residence may be considered home equity loans, and therefore limited to $100,000 of principal on which interest would be deductible. Although the IRS has not spoken to this issue, it is arguable that the 1986 Tax Reform Act, which imposed the current limitations on deductibility of interest, would be held to modify the exemption contained in the temporary regulation. However, in the absence of any IRS statement of position, it should be assumed that the regulation may still be relied upon. The IRS continues to follow the regulation, and has shown no interest in revisiting it.

A “Best in Class” Expense Management Process

Thursday, November 13, 2008 by SIRVA Relopinion

Accurate and timely accounting of relocation expenses has a far-reaching impact on the overall performance and success of a corporate relocation program, to both the company and the individual transferee.

The company benefits in several ways when a “best in class” expense management process exists, including:

Efficient use of staff
Sophisticated processes that track corporate “spend” from initiation to payroll reporting to the “true-up” of expenses (as a result of the tax gross up methodology used)
Consistent policy interpretation
Objective and accurate expense reimbursement audits
Reduction of exceptions requested
Consistent tracking of exception approvals
Convenient, accurate, single-source management reports
Efficient reimbursement via payroll or check processing
Reduced risk of penalties from IRS tax audits
Accurate gross-ups, payroll reporting and year-end tax true-up

The employee benefits from:

Timely reimbursement of expense reports, normally within four days

Information typically available online with easy access to policy, FAQs and electronic expense reporting

Convenience and speed in answering questions

Year-end summary report including all expenses paid to or on their behalf

Year-end reconciliation of relocation expenses, including an itemization of what is and what is not taxable and the tax gross up where applicable

To learn more about managing corporate relocation expenses, please visit our resource library.

Benefits of a “Best in Class” expense management process

Wednesday, September 17, 2008 by SIRVA Relopinion

Efficient use of staff
Sophisticated processes that track corporate “spend” from initiation to payroll reporting to the “true-up” of expenses (as a result of the tax gross up methodology used)
Consistent policy interpretation
Objective and accurate expense reimbursement audits
Reduction of exceptions requested
Consistent tracking of exception approvals
Convenient, accurate, single-source management reports
Efficient reimbursement via payroll or check processing
Reduced risk of penalties from IRS tax audits
Accurate gross-ups, payroll reporting and year-end tax true-up

The employee benefits from:

Timely reimbursement of expense reports, normally within four days
Information typically available online with easy access to policy, FAQs, and electronic expense reporting
Convenience and speed in answering questions
Year-end summary report including all expenses paid to or on their behalf
Year-end reconciliation of relocation expenses, including an itemization of what is and what is not taxable and the tax gross up where applicable

International Relocation: Cross Cultural Awareness

Friday, August 15, 2008 by SIRVA Relopinion

Here are a few things to remember when instituting a cross-cultural awareness program into your corporate relocation program. For a full account of information regarding this service visit our resource library.

Don't forget the family
Just as spouses should be involved in the assignment selection process, they should be involved in training for global assignments. Some experts estimate that nearly 80 percent of all failed global (international) assignments can be linked to the spouse's inability to adjust to the new environment. Each member of the family faces special issues in the expatriate environment that should be addressed.

Other cultural resources
Organizations should consider utilizing their returning expatriates for help with cultural awareness initiatives. Employees who have already completed similar assignments can act as subject matter experts (SMEs) to help new expatriates learn business customs and how to navigate foreign business circles. SMEs can also prove invaluable in helping new expatriates learn the hierarchy in companies with which they will be dealing. It's important to note, however, that companies should not rely solely on employees to provide guidance to new expatriates. Relying exclusively on veteran expatriates can be problematic if the guidance reinforces cultural stereotypes or results in the new expatriate adopting the predecessor's bad habits. While other international assignees have a role to play in helping newcomers adjust, they should not replace professional consultants/trainers.

Alternative views
Although cross-cultural awareness is important, some might argue that its importance is just a hyped up myth. In actuality, on average only 30 percent of American managers sent on international assignment lasting from one to five years receive any cross-cultural training. It can be argued that managing is simply "managing," so where it is done is irrelevant. Another point of view is that any type of short-term cultural training would be ineffective because people can't learn to work and live in a foreign culture after only a few days (or even a few weeks) of training. Others argue that an understanding of a country's culture is something people assimilate over many years based on personal experiences in that specific culture. Others will say that corporate culture takes precedence over country culture. For example, a local employee working for a "bullish" American firm in Thailand might show traits of aggressiveness and conflict, which are not traits normally associated with the Thai culture. These traits, however, may be common in the corporate company culture of the employee's organization, causing the Thai employee to act outside his or her normal cultural dimensions.

Nevertheless, in order to be successful, an expatriate must be comfortable with his or her staff, colleagues, clients and business atmosphere--regardless of location. Cultural specialists also agree that to be successful in dealing with people from other cultures, expatriates need knowledge about the cultural differences (and the similarities) among work locations. The global employee of today's business world can only benefit from gaining cultural awareness, either through direct training or personal experience, which would lead to greater professional effectiveness and company performance. Read more

If you would like more information about cross-cultural education and how it can be added to your international relocation package/program, please contact our corporate relocation consulting team.

Introduction to Home Sale Tax Issues

Monday, July 21, 2008 by hank roth

Employers who reimburse brokers’ commissions and closing costs on the sale of their employees’ homes, as part of a relocation, create taxable income for those employees. Since the Tax Reform Act of 1993, no deductions for such relocation expenses are available to employees, and, therefore, all such payments create fully taxable income. As an example, the average sales commission and closing costs on a $300,000 home are approximately $24,000 or about 8% of the home’s value. Reimbursing these fees creates a tax liability for the transferee of approximately $8,400 in state, local and federal taxes. For transferees in high-income brackets, this tax liability can run as high as $11,400 (slightly under 50% of the estimated closing costs).

Many employers, attempting to relieve the tax liability for their employees, reimburse their employees for these taxes. In the relocation industry, this is commonly referred to as “gross up.” On a $8,400 tax liability, however, the initial reimbursement creates $3,300 in additional taxes for the transferee. Most companies also gross up this amount. If $8,400 is fully grossed up, so that the employee has no net-tax liability, total tax reimbursements come to an average of $16,080 (about 67% of the broker’s commissions and closing costs reimbursed) and can reach over $21,230 (about 88.5% of the reimbursement) for employees in the highest tax bracket.

To eliminate the creation of taxable income these reimbursements create, certain employers have used home purchase programs – also called “buyouts” – designed to utilize the tax effect of the 1972 IRS Revenue Ruling 72-339. In November of 2005, the IRS finally issued an updated and very detailed new Revenue Ruling (Rev Rul 2005-74) which reaffirmed that home sale programs if constructed in alignment with the examples in the Revenue Ruling would still obtain the tax benefits of Rev. Ruling 72-339. Unfortunately, according to the Employee Relocation Counsel (ERC), historically the cost of buyout programs average almost 17% of the acquisition price of the home. As a result, many corporations have never employed home purchase programs, while others have abandoned buyouts and are looking for other options…read more.

To read the rest of the conversation, visit our resource library.

Relocation Policy Tip: Short Distance Group Moves

Wednesday, July 16, 2008 by SIRVA Relopinion

Group moves occur for a variety of reasons and in most cases can be treated (relative to the IRS rules) exactly as other non-group moves. A group move, however, may not meet the IRS 50-mile test. In that case, consideration should be given to providing a short distance group move policy. The IRS 50-mile test generally requires that in order for certain costs associated with a relocation to be excludable from income, the distance between an employee's old residence and the new work location must be 50 miles greater than the distance between the employee's old residence and the old work location.

It is not uncommon for companies to change office locations, or have multiple facilities in the same geographic area, where the distance between an employee's old and new work location may or may not meet the IRS 50-mile test. For example, in larger cities, where a move may be from one side of a metropolitan area to the other, it is likely that the IRS test will not be met. These "short distance" office relocations, however, can significantly impact the commuting patterns of employees. It is highly unlikely that employees impacted by an office move, where their commute could be increase by up to 49 miles, will simply accept an "IRS explanation" as to why they are not entitled to relocation benefits. Employees will often make their feelings known and ask management to consider providing some or all of the relocation benefits provided in a standard regular or "long distance" employee transfer.

The relative distance that a short distance group move involves, necessitates a closer look at the specific features provided in a company's relocation policy to see if benefits should be offered for a short distance group move. Properly structured, short distance group move programs reduce absenteeism, attrition and administrative time, and are often far less costly than a normal relocation program.

For more information about short distance relocation packages, visit our relocation resource library and view our white paper.

The New Shape of Relocation: SIRVA University 2008 Re-Cap

Tuesday, April 8, 2008 by David Barlow

This March SIRVA University, SIRVA Relocation’s annual conference exploring corporate relocation industry trends and professional development, played host to 150 of the nation’s top relocation industry executives. The event, which was held at the Westin Kierland Resort in Scottsdale, Ariz., provided an exclusive forum for industry insiders to discuss vital, ongoing and emerging relocation industry issues with experts and colleagues.

Attendees included representatives from human resources, domestic relocation, global mobility, and procurement and supply chain departments from more than 75 different companies.

This year, conference roundtables and educational sessions covered topics ranging from promoting corporate relocation programs, home loss-on-sale assistance, developing employee relocation packages for global mobility and relocation trends in China. Additional sessions addressed relocation fundamentals, such as policy trends and best practices, and provided a comprehensive history of the industry—on both a domestic and global scale.

SIRVA University Presentations Available Online

Those who were unable to attend this year’s event can download SIRVA University presentations and event images at www.sirvauniversity.com/agenda.asp. Individuals can also download audio recordings of the various sessions to hear them as they were presented, including question-and-answer sessions. Individuals seeking more information on SIRVA University 2008 can e-mail sirvau@sirva.com.

Beyond "Satisfaction": Meeting the Complete Transition Needs of Your Employees

Wednesday, March 5, 2008 by SIRVA University

The Panel:

Maura Carey, CRP

Vice President,

Strategic Accounts

SIRVA Relocation

Amy Carter

Global Supply Chain Manager

Intel Corp.

Peggy Love

President & CEO

Full Circle International

Relocations, Inc.

Sandy Palmer, SCRP

Manager, Corporate Relocation

Cargill, Inc.

While concrete, logistical items such as household goods shipments or home marketing assistance receive priority treatment in corporate relocation programs, for employees and their families, the “soft” transitional and settling-in services can make the difference between a successful and a failed relocation. As Maura Carey and her panel discussed, the complex process of relocation is hard on the entire family, not just the employee.

Relocating employees and their spouses want and arguably need several “touch points” during the relocation process, where they can receive assistance ranging from the concrete (locating daycare for small children) to the less tangible (ideas for helping teenagers adjust to their new surroundings). Companies can incorporate introductions to social and job networks, school assessments and recommendations, and specialty tours of shopping and cultural areas into their relocation programs in order to ease the family’s transition. Not only are such services relevant from a comfort standpoint, but they are also important from a business perspective. Effective destination services should increase transferee acceptance rates as well as provide a tangible, differentiated benefit for recruitment and employee development.

In order to illustrate some of the points made during the discussion, Sandy Palmer, manager of corporate relocation for Cargill Inc., reviewed a case study. During the last four months of 2007, Cargill conducted a Transition Support Services pilot program. One key finding was that transferees and their families unequivocally enjoyed and appreciated having someone to walk them through the settling-in process, check-in frequently and assist with the “soft” transition issues early in the assignment. Amy Carter, global supply chain manager for Intel, referred to the family’s first two weeks in the new location as the “Golden Window” of opportunity to make sure that they feel comfortable in the new surroundings. Failure to achieve this comfort can sour the entire assignment or even prevent the employee from accepting a future relocation assignment. Basic “niche” services such as stocking the refrigerator prior to the family’s arrival in the new home or getting the children involved in activities immediately can help the transition, Amy explained.

Building on the comments of the other panel members, Peggy Love, president and CEO of Full Circle International Relocation, Inc. asserted that destination services must involve two elements, local knowledge and a focus on the adjustment process for the family. Also, she emphasized the importance of customizing the transition program for each family because the success factors vary for each family’s situation.

Keeping in mind that Peggy cited family concerns as the biggest reason for an employee turning down an assignment, companies cannot overlook transition services when designing their corporate relocation programs. Even domestic transferees can receive tremendous help from a one to two day orientation in their new area. When the employee and the family experience a smooth relocation transition, it not only mitigates stress and inconvenience, but it also allows the employee to focus more quickly on the reason for the relocation in the first place: the job.

What transition services are your transferees and assignees asking for to support their success in the new location?