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Modifying your lump sum program could yield big savings

Lump sums remain a popular and efficient way for employers to provide relocation assistance to new hires and transferees. It’s easy to

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Lump sums remain a popular and efficient way for employers to provide relocation assistance to new hires and transferees. It’s easy to see the appeal – just issue them a check and let them plan their move as they see fit.

But given how complicated and significant taxes can be, this approach often leaves the employee without enough money to cover their move, giving them unnecessary frustration before they even start work.

The IRS allows certain move-related expenses to be tax deductible. But that said, a lump sum, even when distributed for a move, is considered taxable income. So, depending on the employee’s tax bracket, they will see a sizable amount removed before they can spend any on their move.

Some companies compensate for this by offering a gross up on lump sum payments, where they increase the base payment so that the after-tax amount nets out to the originally stated amount. (Offering $12,800 to someone with a 28% tax rate, so they receive $10,000 after taxes.)

This isn’t altogether a bad strategy, but applying it to an entire lump sum, instead of only toward those expenses that are not tax deductible, gives up tremendous cost savings.

Consider a modified lump sum + professional move approach

More companies are offering modified lump sums with a gross up to cover expenses that are not tax deductible, and then separately handling the cost of professional moves, which are deductible.

For example, to issue a single lump sum payment that would cover both a professional move of $10,000 and then another $10,000 for other expenses, the employer would need to pay $25,600, after the gross up ($5,600), to cover the resulting tax burden, again, assuming for a 28% tax rate.

However, covering the $10,000 professional move expense separately – where the employer could write off the tax burden – would only require a $2,800 gross up on the modified $10,000 lump sum – all totaling $22,800, a saving of $2,800!

Not only does this approach save money, it simplifies the move process for the employee by having the moving company pre-selected by their employer. This also allows the company to find a relocation partner who can support their overarching talent management goals.

Suffice to say, there are a lot of nuances when it comes to corporate relocation, and many companies don’t have the bandwidth or resources to fully manage and follow those in-house. If you think modifying your lump sum program could save your company money, let us know – we’d love to help.