The COVID-19 pandemic has hit the reset button on car allowances and reimbursement rates. Now is a key time for organizations to rethink their vehicle reimbursement approach and develop fairer, more flexible rates.
COVID-19 pandemic and vehicle reimbursements
Outside of industries deemed essential, mobile employees largely found themselves working from home in 2020. In response, many employers altered car allowances and reimbursement policies. On our annual survey, 80% of mobile employees reported negative impacts from changes to business vehicle policies.
While at home, employees continued to incur ownership related costs on vehicles used for work purposes. Though they traveled far less (or not at all), they still had to pay for insurance, registration and license, and property taxes, not to mention depreciation. Employees reimbursed with a mileage rate may not have driven enough to cover these fixed costs, while those whose car allowance was suspended or reduced may also have struggled to cover those fixed costs.
As business travel rebounds in 2021, organizations have a key opportunity to set new reimbursement rates. With employees unsure whether their car allowance or reimbursement will keep up with the increased vehicle expenses and rising gas prices, now is a good time to learn the key ways to develop a rate that can handle unpredictable travel conditions and costs and provide sustainable, fair reimbursements to employees.
1. Base the reimbursement rate on localized vehicle costs.
The number one challenge to both car allowances and mileage reimbursements is the wide variety of expense incurred by different employees. Some work in expensive areas like California, where gas consistently costs more than a dollar above the national average per gallon. Some cover large territories and accrue a lot of highway miles, while others work in urban areas where they cover fewer miles but still spend a lot of time in the car and may face higher than average costs.
Because a car allowance pays a set stipend, workers incurring varying levels of expense are likely to experience varying levels of satisfaction with the company's set rate. On top of this, taxes can reduce the take-home amount by as much as 40%.
While most mileage rates deliver non-taxable reimbursements, paying a company-wide mileage rate (such as the IRS rate) creates a similar problem. A driver with a small urban territory will probably not be able to accrue enough mileage to offset total vehicle costs (including the fixed costs of ownership). But a high-mileage driver in an inexpensive part of the country will probably be over-reimbursed relative to their expenses.
The solution is to adopt a reimbursement model that is non-taxable and takes localized costs into account. Yes, this requires some research and calculation, but the investment of time (or money, if you outsource the rate development), will be well worth it in employee satisfaction and long-term sustainability (i.e. not throwing away money to tax waste or to over-reimbursement of some employees or losing top talent).
2. Base reimbursement rates on a standard vehicle.
While most vehicle reimbursement models apply a standardized rate to a variety of locations and vehicles, the secret to a fair rate is to apply a variety of localized cost situations to a standard vehicle. This concept requires a shift in thinking about car allowances and reimbursements, but let's consider why it makes sense.
While it is fair for the employer to factor in the different costs incurred by different mobile employees (i.e. regional and mileage-related costs), whether an employee chooses to drive a high-cost vehicle should not factor. Instead, deriving the car allowance or reimbursement based on a standard vehicle appropriate to the job treats both the organization and the employees fairly. The employees can still drive whatever they like, but the company can transparently demonstrate a reasonable basis for the reimbursement rate using that standard, reasonable vehicle.
Data can be found for the average costs of a given vehicle driven x number of miles. These amounts can be adjusted up or down based on whether the vehicle is garaged in a California, Texas, or New Jersey zip code. Taking this data-driven approach can ensure fair reimbursements plus the flexibility needed to achieve long-term effectiveness in a business vehicle policy.
Rethinking vehicle reimbursements in a post-pandemic world
Now is a key time to reconsider the traditional ways of approaching car reimbursements. Taxable allowances are wasteful. Standard mileage rates cannot address wide differences in distance driven or localized costs. But using a standard vehicle to derive geographically cost-sensitive rates is the way of the future.
To learn more about non-taxable, flexible car allowances, read "The FAVR Car Allowance, Defined," or contact mBurse to hear about our rate development process. We will be happy to guide you in developing a fair, flexible, and sustainable car reimbursement rate.