This post is part of a series of blogs outlining the positives and negatives of various employee-incentive solutions for high-cost areas. Click here to see the full description of the series.
Relocation Policy Solution #4 for High Cost Areas – Cost-of-Living Allowances (COLAs)
Many companies deal with the issue of high-cost areas by providing the employee with an adjustment in pay, commonly referred to as a cost-of-living allowance (COLA). The concept of a COLA is to account for the cost-of-living differences between the old and new locations. The pay increase is determined by obtaining data that includes the entire “market basket of goods and services” for a particular location. Similar to the mortgage payment differential, a lender is able to use the COLA amount as qualifying income for their loan as long as the COLA lasts for a minimum of three years, providing increased buying power in the new area. The disadvantages of using a COLA include:
- The cost for the data can be expensive, and oftentimes companies are paying for data unnecessary to a comprehensive cost of living evaluation.
- Transferees have always questioned the integrity of COLA data. Having so many variables in the market basket provides too many opportunities for transferees to dispute the numbers.
- COLAs are fully taxable to the transferee. Therefore, when COLAs are given, taxes are taken out, leaving transferees with the belief that they have received only a portion of their COLA.
- If the employee is asked to move again, the COLA will be eliminated from their pay. The perception the employee may have is that they are taking a “pay cut” to move to a new location.
As the mortgage industry has adjusted to new underwriting standards, lenders and companies have the opportunity to revise their policies to ensure their home purchase program fits their goals. The right policy changes will help assure that transferees receive consistent and fair high-cost-area assistance. As always, SIRVA is committed to providing you with the most up-to-date information so you can make informed decisions and meet your mobility objectives.
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