Comprehensive Guide To Relocation Lump Sum Programs

Companies might choose from a variety of compensation and reimbursement strategies to help with the hard and expensive task of relocating staff. Recent years have seen a rise in the use of the term “Lump Sum” in the relocation sector.

Offering a lump sum payment is one way to help an employee who is relocating since it can save paperwork and make the total cost of the move easier to budget for.

Due to the increasing competition for available workers, businesses of all sizes are rethinking their strategies for attracting and retaining the best employees.

Some businesses may decide to offer enticing relocation packages in order to recruit and keep top talent. Depending on the employee; they must also decide whether to provide a full-service relocation program, a lump sum payment, or a combination of the two.

While some workers may be better off with a more gradual payout schedule, there are situations in which a lump sum payout could be advantageous.

A lump sum approach, in this case, would be different from a relocation allowance (a common component of domestic and global relocation packages) in terms of its specifics. In the case of an allowance, the employee would receive a miscellaneous relocation allowance to pay for any moving expenses (such as pet shipping or gratuities) that are not specifically addressed by the policy.

A lump sum, on the other hand, is a single payment made to an employee who is relocating to cover all or a portion of the cost of relocation services that would otherwise be provided directly to the employee (e.g., reimbursement for final move expenses and cultural training).

Types of lump sum benefits

Self-service

Employees are expected to use the lump sum as payment in full for all benefits and services.

Here, the worker receives a lump sum of money and arranges for their own transportation and other moving-related expenses. The only assistance the employee gets is the cash compensation.

Managed lump sum

In the case of a managed lump sum or limited support, the worker receives a single payment, similar to self-service. However, in contrast to self-service, the relocation provider offers further assistance and direction on how to make the most of the cash payment.

The employer may facilitate this by putting the worker in touch with their favorite vendors and providing guidance on how to schedule services in the most efficient manner possible. Help is available in the form of a relocation counselor or an online resource hub.

Core benefits

The employer designates certain essential relocation benefits to be covered by a single lump sum payment.

A lump sum is provided to help with things like:

Home finding trip
Final move
Temporary housing
Excess baggage
Cultural training

A relocation service provider can advise you on how to spend your lump money to get the most out of it, just like they would if you chose limited or managed support.

As part of this, we may put the employee in touch with our trusted service providers and explain how they may best fit their relocation needs into their schedule. Help is available in the form of a relocation counselor or an online resource hub.

With this strategy, companies can request proof of payment from workers to ensure the money was spent on approved necessities.

Flex benefits

In addition to the standard perks offered by most companies, a lump payment can be used to cover any supplementary services that employees may need. Due to the adaptability they bring to a certain relocation program, these perks are known as “flex benefits.”

Flex benefits could include:

Family support
Spousal support
Pet shipment
The return trip back to the origin
Additional home-finding trip
Additional temporary living

Once again, the relocation service provider advises on how to get the most out of the lump sum payment.

Benefits of lump sum programs

Providing employees with a flat sum payment is preferable to forcing them to pay for their own relocation. However, a lump sum package may be modified to include extra features that make it more convenient for the company and more appealing to the employee. This can be significant when trying to hire and relocate members of the millennial age.

Companies can manage costs and the budgeting process easier, with much less stress on accounting, procurement, and human resources. The employer can avoid keeping track of employee expenses or coordinating with movers because neither is necessary.

Controlling expenses is made easier with a lump sum payment to employees. A flat or defined price removes the uncertainty and makes budgeting for a move simpler for companies.

Once a lump sum value is determined, there may be a reduction in the number of exception requests received.

How to develop lump sum benefits

Questions to consider

Should the money be given to the worker before, during, or after the relocation?
Is the one-time payment adequate to cover all that must be paid?
If not, what costs will be covered by the company?
In what ways will the worker be responsible for out-of-pocket expenses?
What is the employee’s wage or compensation structure?
How long has the worker been with the firm?
How many other family members will be moving as well?
How about the worker’s housing situation? Do they own a home, or do they rent? Would they have to sell their house?
Is there a need for short-term housing or storage space for the worker? For how long?
Is the worker moving far?
Are they planning to relocate to a really expensive area?

Calculating lump sum amounts

Company-determined: The employer decides on a fixed amount based on their own estimates of the costs associated with providing the employee with the desired relocation benefits.
Based on the location: Depending on where the employee is relocating to or from, some companies use standard, predetermined sums for their total lump sum compensation. When determining this sum, some businesses consider the employee’s home base, while others focus on the place where the worker will ultimately settle.
Flat amount: Some firms have a set policy regarding the maximum amount they will pay to move an employee. Each employee is given the same lump sum payment to cover their relocation costs, regardless of how far they’re moving or where they’re moving to.
Based on distance: The lump sum payment is determined by the distance the employee is moving across, with a predetermined dollar amount being applied every mile.
Using software: Some companies utilize software to calculate a single figure for all or a portion of an employee’s relocation benefits package. An employee inputs information about the transfer, including the distance in miles, the number of family members moving, and other details, into a computer program, which then calculates the lump sum payment.

What should a lump sum cover?

The specifics of a lump sum program benefit can change depending on the employer, the employee’s level of seniority, and other considerations.

The following are examples of how businesses use lump sum payments:

Temporary housing
Household goods shipment
House-hunting trip
Visa/immigration
Tax
Cultural training

Which policies include a lump sum payment?

Companies typically pay for all or a portion of the perks associated with a move in one flat amount. But domestic one-way transfers, long-term assignments, and permanent relocations normally involve a lump sum payment.

How is the lump sum provided?

This one-time payment can be issued in the form of a regular paycheck, a wire transfer to the employee’s bank account, or a company debit card (a great option for new hires not yet on the payroll).

It is also possible for corporations to repay employees for their relocation costs after the fact.

Challenges of lump sum programs

Not attractive enough for everyone: If other employers have more comprehensive relocation plans, a lump sum contract without any additional flexibility or additions may not be the best choice for employees.

Company culture may suffer: The company’s culture may suffer if employees are only offered a single lump sum payment. Company culture is increasingly important as the proportion of millennials and Gen Zers in the workforce rises. A solo lump sum bonus may not convey to the employee that they are highly regarded by the organization, especially considering the increasingly competitive talent market.
Potential coverage gap: There may be certain out-of-pocket expenses that are not included in the first cost estimate. For instance, if a mover’s estimate is lower than the final cost, the employee may be responsible for making the difference. When it comes to the employee’s actual expenditures and trends, a lack of data could lead to a gap in coverage.
Unclear use of funds: The difficulty, as with any lump payment scheme, is making sure the employee spends the money for what it was intended: in this case, moving costs. The employee may not use the funds in a way that facilitates their move, transition, and initial settling in.
Employees take on the moving burden: Workers who are offered a lump amount must shop around like consumers in order to make a career-related relocation. In other words, they won’t get the same deals or priority treatment as workers whose employers have arranged for professional movers to handle their relocations. The current severe lack of drivers only exacerbates the problem. Employees moving as individual consumers may be forced to wait if moving companies prefer corporate contracts over one-time moves and there are not enough drivers to go around. An employee who accepts a lump sum relocation package will have to take on all of the responsibilities of a modern transfer on their own, which can be a significant burden.
Taxability issues: Relocation expenses paid by the employer on behalf of the employee may not be taxable based on circumstances such as move type, destination location, the objective of relocation/assignment, and treaties; however, lump sum payments always are. The employee’s tax bracket may change if they receive a large lump sum (instead of the whole program), and this may have an effect on financial aid.
Potential loss of productivity: When workers are preoccupied with the logistics of moving (such as selling a house, finding a new place to live, and organizing for movers), they are less able to focus on their work or on getting ready for a new role. Reduced morale, more sick or vacation days taken to help with the relocation, and decreased productivity are all possible outcomes.

Impact of the new tax law

Experts in charge of corporate relocation initiatives also face challenges from the new tax law. Companies and their transferring employees are both affected by the new tax reform and its effects on relocation programs.

Although there may be no immediate effect on the lump sum, some adjustments may necessitate an increase in the amount provided to transferees to account for indirect costs.

Some of the most important ways in which a lump sum move could be affected are as follows:

Moving expense deduction: The new tax code does not allow taxpayers to deduct either federal or state moving costs. Therefore, the transferee cannot deduct or subtract the remaining moving costs if the lump sum amount is insufficient to cover them all. If tax time rolls around, this could be a source of frustration for the recipient of the transfer. Not all states, however, are adopting the new regulation. Virginia, Pennsylvania, New York, New Jersey, Mississippi, Minnesota, Massachusetts, Kentucky, Iowa, Hawaii, and Arizona are among the states that still enable residents to deduct moving costs. Vermont, South Carolina, Maine, California, and Arkansas are among the states currently trying to figure out how they would be affected by the new tax policy. It is important to stay updated and take gross-ups into account depending on the state an employee will be migrating to as states decide if and how to apply these new regulations.
SALT: The deduction for state and local taxes (SALT) has been eliminated. Employees will have a greater financial burden if they relocate to a region with higher local or state taxes. Once again, companies should consider grossing up lump sum payouts for workers in this position.

Conclusion

Businesses can simplify and streamline the process of financing employee relocations using lump-sum relocation programs while still providing employees with enough options to meet their needs. Both the employee and the company stand to gain from the more efficient and predictable process that a lump sum payment enables.

In addition to the wide range in which companies use lump sum payments, the varying nature of the benefits they provide necessitates a range of approaches to costing. Interestingly, while many businesses use software to determine the total lump sum amount, a greater percentage use software to determine the lump sum amount for specific benefits.

This demonstrates how, in some circumstances, businesses are tailoring benefit quantities differently than others; this may be because some advantages are more price sensitive than others due to considerations like location, family size, and cost of living. Comparing businesses that use distance-based pricing with those that use flat rates for benefits reveals similar trends. This demonstrates how many organizations use a wide range of approaches to calculating lump sum benefits.

Although lump sum payments are common for many different sorts of migrations, they only account for a third of long-term moves.

Reasons for this could include the employee’s inability to exercise choice over how the money is spent and the high taxes that would be incurred. There may be some clues as to why full-service relocation programs continue to be preferred over a lump sum for permanent relocations if we look at some of the difficulties associated with lump sum relocation and the additional challenges of the current landscape (the new tax law and driver shortage).

So, businesses need to check how their relocation package compares to competitors in the same field and size.

Culturally, companies should consider what their relocation package says about the organization and whether or not they place sufficient importance on their employees.

Those in charge of staff relocation plans at their companies should also keep up with the latest tax legislation. By doing so, they ensure that they are prepared for the possible need to increase compensation to accommodate transferees’ additional financial obligations and for any other factors that may arise as a result of employee relocation.