IRS Rules for 2022 FAVR Auto Plans

Written by mBurse Team Member   |   Jan 31, 2022 7:00:00 AM
2 min read

Every year, when the IRS releases its new standard mileage rates, a new maximum standard automobile cost for FAVR programs is released. The cap for 2022 was increased significantly over 2021.

Maximum standard auto cost for 2022 FAVR

While many organizations pay a standard monthly car allowance amount or reimburse employee mileage, some opt to use a more complex but more accurate system of reimbursing employee travel costs. Fixed and variable rate car allowances, also known as FAVR plans, use a standard automobile to generate reimbursement rates for employees, differentiated by localized costs in their specific geographic location.

In 2022, the IRS has increased the maximum cost of a standard vehicle used to generate FAVR allowances by $5,000. At $56,100, this cap is significantly higher than last year's cap of $51,100. This is not a surprise given the rapid increase in the sale prices of cars and trucks – new or used – due to supply chain problems that saw demand outstrip supply.

Selecting a standard vehicle for FAVR auto plans

By significantly boosting the max cost for a standard automobile, the IRS made it easier for employers to support their employees in their choice of a safe, reliable, nice-looking vehicle to carry out their jobs. 

Unlike other approaches to vehicle reimbursement that standardized the payment amount or the reimbursement rate, FAVR standardizes the vehicle used to derive rates. Employees may still drive the vehicle of their choice rather than the standard vehicle model itself. That model is merely used as a basis for calculating reimbursements.

[Read more: How Reimbursement Using a Standard Vehicle Works]

The standard vehicle enables the company to determine what a reasonable 2022 reimbursement is for the type of vehicle necessary to complete the job, garaged in a specific location. This approach is an IRS-approved way to deliver tax-free reimbursements while avoiding the under-reimbursement and over-reimbursement typical of more standard approaches.

Cost of a 2022 FAVR car allowance plan

For a FAVR car allowance program to operate properly within IRS guidelines, there are 28 rules that the employer must follow. Because of this complexity and because FAVR reimbursements are individualized for each employee, many organizations assume that this approach will prove too costly in terms of administrative time.

However, this is a misconception. FAVR programs tend to prove cost-effective for many organizations, especially when introduced as a replacement for a taxable car allowance. The elimination of taxes provides more than enough savings to pay for the new program, improve the average employee benefit, and restrain long-term costs.

The key to gaining the benefits of a FAVR plan is to use a third-party program administrator who can handle the administrative challenges and make sure all IRS rules are followed. A good program administrator will deliver a cost-effective program that benefits both the company and the employees.

To learn more about the cost and benefits of FAVR program administration in 2022, contact mBurse today. Or start by using an online calculator to compare the cost/benefit of your current program with a FAVR plan.

Car allowance vs. FAVR Reimbursement

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