Medical Device Company Saves 260K
with FAVR Vehicle Plan

THE CLIENT

A medical device company with 64 employees was paying both a car allowance and a mileage reimbursement. The car allowance payments were fully taxable, while the mileage reimbursements were delivered tax-free. This plan essentially mirrored a FAVR plan, but without the full tax savings.

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The Problem

Management realized that the combination of a taxable car allowance and a mileage reimbursement was over-reimbursing many of their employees. Unlike the many organizations that make the mistake of ignoring their car allowance amount for years at a time, this company had made a commitment to increase the car allowance every three years, a different kind of mistake. In addition, employees had gradually been increasing their self-reported mileage on the spreadsheet log.

Business vehicle costs were increasing unsustainably, and the company needed to do something about it. At the same time, they knew employees would object to changes that eliminated the over-reimbursements if it meant less take-home pay. How would they reign in costs while preserving employee trust?

The Goals

  • Streamline the car allowance and eliminate tax liability
  • Ensure that car reimbursements tracked with actual costs
  • Create a cost-neutral vehicle reimbursement program

Solutions

All of this company’s problems stemmed from essentially operating a fixed and variable rate reimbursement plan (aka a FAVR plan) without the tools necessary to do so. Our solution was simple – adopt a FAVR reimbursement plan using the appropriate tools.

A genuine FAVR program pays a non-taxable allowance plus a non-taxable mileage rate, both derived from geographic cost data and both responsive to changes in costs over time. The first step for the medical device company was to follow the IRS guidelines necessary to convert the fixed monthly payments (the car allowance) to non-taxable payments. It turns out that their allowance amount was 40% higher than industry standards and 30% higher than actual fixed vehicle costs.

The second step was to adjust the mileage rate to rise and fall with variable costs like gas prices in each employee’s region. Finally, the company adopted our mileage tracking app, mLog, eliminating the self-reported mileage on the company spreadsheet and resulting in more accurate mileage reports.

The Numbers

Eliminating taxes yielded massive savings

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$259,574
Company Savings
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-24%
Reported Mileage
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+5.5%
Employee Benefit

Results

The company’s net savings of nearly $260,000 resulted primarily from eliminating taxes and reducing over-reports in mileage. Because the company elected to reinvest the tax waste into its employees’ benefits, the average employee benefit saw a slight increase rather than a decrease, mitigating concerns about savings coming at their expense.

The drivers actually could have enjoyed a higher relative benefit, but previous mileage padding had already inflated their reimbursements. This robust but sustainable car allowance positioned the company to attract and retain top talent.

Key Takeaway

The value of eliminating taxes on a car allowance cannot be overstated. This is the single most effective way to rein in costs while sustainably offering a competitive employee benefit. But in order to effectively operate a FAVR reimbursement plan, it is essential to also adopt an accurate, user-friendly mileage log that does not rely on self-reporting.