The fixed and variable rate (FAVR) reimbursement leverages data to reimburse more precisely and equitably than any other vehicle reimbursement plan, providing a tax-free, defensible, and cost-effective tool to offset employee expenses.
If you’ve spent any time on the mBurse website, you’ll know that we promote fixed and variable rate reimbursement (FAVR) as the preferred way to address employee vehicle expenses. The following Q & A answers common questions about this best practice approach to auto reimbursements.
What is FAVR?
The IRS has recognized FAVR as an accountable reimbursement procedure since 1992. A FAVR car allowance differs from a traditional car allowance in two important ways:
- Drivers receive payments as non-taxable expense offsets, rather than as taxable compensation.
- Payments are derived from and responsive to actual expense data, rather than from a set, one-size-fits-all amount applied to unequal driver expenses.
FAVR also differs from traditional mileage reimbursement programs because it combines a fixed monthly amount with a variable mileage rate, rather than paying only a set, one-size-fits-all mileage rate.
FAVR was specifically designed for corporations to use for proper reimbursement of employees, whereas the IRS mileage rate was designed for use by individual taxpayers seeking to deduct business mileage.
How does FAVR work?
An organization selects a standard vehicle to be used to generate the car reimbursements for each employee. The vehicle is based on what the employees need to carry out their job, not what they actually drive. The organization selects a business class vehicle that would be considered fair to reimburse everyone as opposed to reimbursing each employees based on their personal choice in vehicles
Each employee receives a vehicle reimbursement based on:
- Their home zip code or garaging point
- The standard vehicle chosen by the company
Each employee then receives a vehicle reimbursement schedule that details all of the costs being they are being reimbursed. These costs are broken into two major categories: fixed costs and variable costs. A typical schedule covers the following types of expenses:
Fixed costs, addressed by a fixed monthly amount (i.e. a car allowance):
- Insurance
- License fees
- Vehicle taxes (if applicable)
- Registration
- Depreciation
Variable costs, addressed by a cents-per-mile rate that adjusts each month for each employee:
- Gas
- Oil
- Maintenance
- Tires
Because the rates are transparent, scalable, and accurate they comply with employee-friendly states that have expense indemnification codes. This benefit is particularly important for organizations with employees operating in California and Massachusetts.
What guidelines must a FAVR plan follow?
The IRS has issued a set of requirements that define FAVR and delineate it as a non-taxable, or accountable, auto reimbursement plan. The vast majority of the rules are based on data modeling. Some of the better-known rules govern:
- Vehicle value
- Vehicle age
- Insurance requirements
- Annual business mileage
- Business use percentage
- Control employees participation
Quite a few people do not know that some of the FAVR requirements are based on the company’s objectives. For example, if a company would like to control their image they can use nicer or newer vehicles to generate the reimbursement rates. This in turn would require employees to utilize nicer or newer vehicles. FAVR programs are customizable to company objectives.
How do you administer a FAVR program?
Because FAVR regulations involve complex calculations and change annually, it is best to have a third-party administrator design, implement, and manage your program as opposed to self-administering. A trusted advisor that stays ahead of the rulings and has experience with administration can prove indispensable.
An analogy: No one tries to administer their own health care benefits. It could be done, but it would tie up valuable time and resources when it is much easier to find a benefit broker.
Switching from a traditional car allowance to a FAVR plan frees up significant financial resources by eliminating tax waste. This allows an organization to improve employee benefits and reduce overall expenses all while paying a third-party administrator.
Similarly, switching from the IRS mileage rate frees up resources by eliminating overpayments to high-mileage employees and reducing attrition due to the underpayment of low-mileage employees.
Why should my organization choose FAVR?
FAVR programs were designed specifically to determine auto reimbursements accurately, equitably, and easily. An organization is able to reimburse employees exactly the same way they incur costs, based on where they live and drive.
FAVR programs make sense because they will not over or under-reimburse employees. They also
- Control company costs
- Mitigate risks (from labor codes and general liability)
- Help attract and retain talent
With the changes to the tax code from the 2017 reform, it is more important than ever to stop paying a flat taxable car allowance or over-reimbursing using the IRS mileage rate. The new law eliminated the unreimbursed business expense deduction. Consequently, employees will be looking for a vehicle reimbursement that makes their expense offset as close to whole as possible.
The company should be looking for a vehicle reimbursement that is accurate for each employee while controlling costs, something that is not easy. Remember there are states where employees can sue for unreimbursed business expenses.
Conclusion: FAVR solves auto reimbursement problems
Whether you use a car allowance or a mileage reimbursement or some combination, you will face challenging questions as you seek to offset employee vehicle expenses:
- Are you offsetting a business expense or providing a business perk?
- Are you over-reimbursing some employees while under-reimbursing others?
- Are you and your employees losing money to unnecessary taxation?
- Are all of your employees happy with their car allowance or reimbursement?
- Are you able to control reimbursement costs and stay within budget?
- Are you inadvertently violating state labor laws via insufficient reimbursement?
FAVR resolves these quandaries and simplifies reimbursement of employees for the business use of a personal vehicle.
Just because FAVR should be administered by a third party does not mean it is complicated to understand. Switching to a FAVR program can be communicated to employees in simple and convincing ways when implemented so that everyone in the company understands how the switch will benefit them.
mBurse specializes in helping organizations adopt and implement FAVR programs. Find out how your organization and its employees could benefit today.
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