Your organization can craft a vehicle reimbursement plan that retains valued employees. The key is a data-driven approach that builds a culture of transparency and trust.
Your organization's vehicle reimbursement rate may not rank among the priorities. But if you have employees who drive a lot as part of their jobs, chances are that reimbursement plan means a lot to those employees. It could either be helping you retain workers or driving them out the door.
In a competitive environment, employee satisfaction counts for a lot. High levels of inflation combined with a robust labor market mean that your workforce will be carefully evaluating their financial situation and whether their compensation is competitive.
A transparent and fair reimbursement for vehicle use goes a long way toward creating a culture of trust. Employees need to know that not a single dollar of their business vehicle expenses will cut into their income. (In some states, this is the law.) Crafting such a reimbursement requires understanding how drivers actually incur job-related costs.
To craft a fair, transparent auto reimbursement, you have to understand that all vehicle expenses are not created equal. Some costs are easy to predict. Some are not.
Fixed costs are the costs of vehicle ownership: auto insurance, depreciation, taxes, registration/license. Whether an employee drives 1,000 miles a month or 2,000, these expenses remain relatively unchanged from month to month. That makes them easy to predict.
A fair reimbursement starts by calculating the likely fixed costs per month and setting the business portion of that monthly amount as the baseline for payments to defray costs.
Less predictable are the operational costs of a vehicle. These vary more based on how much a person drives: fuel, maintenance, oil, tires. An employee who drives 2,000 miles per month will incur significantly higher operational costs than an employee who drives only 1,000 miles.
A fair reimbursement takes into account these variations by adding to the baseline amount a mileage rate, since these costs depend on mileage. Note that, since the costs of fuel can fluctuate rapidly, this rate should be recalculated on a regular basis as gas prices rise and fall.
Two complications to developing a transparent and accurate auto reimbursement are the kinds of vehicles employees drive and the locations where they live.
A significant factor in business travel expenses is the type of vehicle you drive. If one employee drives a Toyota Prius and the other drives a Ford Expedition, they will experience significant differences in fuel costs. If one employee drives a 2013 model with 150,000 miles and the other drives a 2023 model with only 10,000 miles, they may experience significant differences in maintenance costs.
For these reasons, a transparent vehicle reimbursement plan should NOT take into account what vehicle an employee drives. The fairest way to reimburse is to base all reimbursement rates on a standard vehicle that seems most appropriate to the job.
If your organization operates in multiple localities, geographical cost differences make it harder to develop a business vehicle plan that transparently and accurately reimburses employees. This is where basing rates on a standard vehicle becomes particularly important.
Starting with a standard vehicle significantly reduces the complexities of obtaining cost data for multiple localities. But how do you obtain that kind of data? You can either have a team that researches and calculates it in-house, or you can pay a third-party specialist for that information.
Going the third-party route is typically the most cost-effective. This approach significantly reduces your time spent developing accurate and transparent reimbursement rates. And it takes out all the guesswork.
The IRS defines the kind of reimbursement plan outlined in this post as a fixed and variable rate reimbursement, also known as FAVR. In short, you calculate rates based on localized cost data for a standard vehicle. For the predictable fixed costs, the employee receives a baseline monthly payment. For the mileage-based costs, the employee receives a mileage rate that is recalculated periodically based on gas prices.
By following IRS guidelines for FAVR plans, you keep all payments non-taxable. Whether you are switching from a traditional mileage reimbursement rate or a car allowance, change management focuses on the transparency and accuracy of all payments. Employees can have confidence that they will never find themselves in a situation where increasing vehicle costs are not matched with an increase in their reimbursement.
There is no fairer, more equitable approach than FAVR because no other plan can deliver such individualized reimbursements via automatic calculations. Contact mBurse today to learn more about our consultative, data-driven approach to helping organizations develop competitive, transparent vehicle reimbursement plans.