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 2024 was increased once again as vehicle costs continue to rise.
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. The IRS sets the maximum value for any standard auto used to generate rates.
For 2024, the IRS has increased the maximum cost of a standard vehicle used to generate FAVR allowances to $62,000. This cap has increased by more than $10,000 since 2021, when the cap was $51,100. This is not a surprise given the rapid increase in the sale prices of cars and trucks – new or used – over the past three years.
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.
By boosting the max cost for a standard automobile, the IRS has continued to give workers flexibility in their choice of a safe, reliable, nice-looking vehicle to carry out their jobs. If an employee chooses to drive a vehicle that is more expensive to operate than the standard vehicle, that is their choice, but most vehicles will fit under the maximum cost amount.
[Read more: How Reimbursement Using a Standard Vehicle Works]
The standard vehicle enables the company to determine what a reasonable 2024 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.
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.
When selecting a vendor, look for an organization with an easy-to-use reimbursement platform that integrates with your expense system. Check to make sure that they also have a track record of reliable customer support and technical support. Some vendors may charge less per driver but cost you in headaches due to a clunky platform or inadequate customer service.
To learn more about the cost and benefits of FAVR program administration in 2024, contact mBurse today. Or start with a free FAVR plan comparison.