The HR Guide to FAVR Reimbursement
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For HR directors and managers, vehicle reimbursement programs can be an opportunity to treat employees equitably, promote an organizational culture of transparency and growth, and reduce risk from vehicle-related liabilities. A FAVR vehicle reimbursement plan can accomplish these goals, unlike standard reimbursement methods like mileage rates, car allowances, and fuel cards.
Introduction: What is FAVR reimbursement?
FAVR, or fixed and variable rate reimbursement, is an IRS-approved accounting procedure to offset work-related vehicle expenses incurred by employees.
Unlike standard car allowances, FAVR plans are non-taxable. And unlike standard mileage reimbursements, FAVR reimbursements are consistently accurate and equitable.
FAVR in a nutshell
A FAVR plan derives non-taxable reimbursement rates using localized cost data applied to a standard vehicle.
These rates are applied in two forms derived separately and then combined in one payment:
- Fixed payment for set monthly expenses (e.g., insurance, taxes, etc.)
- A mileage rate for expenses that vary with mileage and market prices (e.g., gas, oil, etc.).
FAVR advantages summarized
- Tax-free payments to all employees
- Localized rates address regional differences in prices
- Transparent, quantifiable accuracy for reimbursement payments
- Equitable payments (no under-reimbursements or under-reimbursements)
This guide will explore four ways a FAVR plan can promote fairness and transparency while reducing organizational risk.
Treating employees equitably through FAVR reimbursement
One of the biggest challenges with vehicle reimbursements is the range of expense needs among employees. When a standard amount or rate is applied across the board, it is guaranteed that some employees will be under-reimbursed compared with other employees.
Geographical cost differences vs. equal reimbursement rates
The same allowance or mileage rate applied to an employee paying $3.50/gallon for gas should not be applied to an employee paying $4.50/gallon. Insurance rates can also vary widely by location.
Paying equal reimbursement rates to employees experiencing different location-based costs is not equitable. Equity requires ensuring the outcome is the same regarding covered expenses.
Territory size difference vs. equal reimbursement rates
An equal car allowance paid to Driver A, who drives 1,000 miles per month, and Driver B, who drives 2,000 miles per month, will not deliver equitable outcomes.
Despite driving half as much, Driver A will pay similar insurance premiums, taxes, and fees as Driver B, assuming the same location, vehicle, and demographics.
Nor will an equal mileage rate. The payment does not increase proportionate to the expenses incurred. This is because all drivers start out with a set base of expenses that they incur, whether they drive a little or a lot.
Driver A may not drive enough to recoup all expenses with a distance-based payment system (i.e., a mileage reimbursement). Driver B could be receiving a reimbursement amount that exceeds costs. Payment inequities like these can deteriorate morale among employees.
Accurate vehicle reimbursement – fair for employee and employer
Accurately reimbursing those two different drivers will mean paying different amounts and deriving those amounts only partially based on miles driven. This is exactly what FAVR does.
Even if two drivers live in different regions, FAVR can deliver accurate reimbursements. The mileage rate portion is adjusted based on current gas prices in each location.
A FAVR plan would reimburse Driver A and Driver B with similar base payments each month to address fixed costs. The mileage rate would be paid on top of this to address the driving-based costs. So, the high-mileage driver would still be reimbursed more, but the difference would be proportionate to the difference in expenses, not miles driven.
This system is fair to the employees because they never have to worry about being under-reimbursed or facing inequitable discrepancies between their reimbursement amount and other employees. This system is also fair to the employer because no one is being over-reimbursed, either.
Eliminating tax waste through FAVR reimbursements
Another consideration is eliminating tax waste from organizations that pay a taxable car allowance.
The adverse effects of taxation on a standard car allowance
Since a standard car allowance policy uses no accounting procedure to prove business use of the payments, these payments are taxable as income. But taxes can eat up 30-40% of an employee’s set allowance amount.
That could be the difference between a sufficient reimbursement and an insufficient one.
When employees know that their car allowance cannot cover their vehicle expenses, they do not feel valued by the organization. They may take unproductive measures to protect their income, or they may eventually leave.
Eliminating tax waste – a win for everyone
Taxation is a significant source of unfairness to employees and inefficient use of funds.
Diverting tax waste into a non-taxable reimbursement like FAVR benefits both the employee and the employer. Here’s how:
Switching from a taxable to a non-taxable plan frees up resources for the organization while freeing employees from worries about whether their expenses will be fully reimbursed. This is a win for the organization and a win for the employee.
FAVR and building an organizational culture of trust and accountability
FAVR plans are data-driven. A fixed-and-variable rate plan helps create a transparent, productive company culture by basing reimbursement rates on accurate vehicle expense data. Here’s how.
FAVR is data-based and transparent, which builds trust
A typical car allowance amount may reflect a competitor’s amount, a general cost estimate, or an arbitrary number. Employees do not know how their rate was determined. A standardized mileage rate, like the IRS business rate, reflects only a broad set of average costs, not each employee’s costs.
Because FAVR plans calculate precise rates based on location applied to a standard vehicle, employees know how their rates were generated. Their fixed payment will match their fixed expenses.
Their mileage rate will be recalculated when gas prices rise. They don’t have to worry about coming up short during a month in which they drive less than usual.
This kind of transparency builds trust. When employees trust that their payments will be accurate and equitable, they can do their jobs without distractions surrounding reimbursements.
Transparency works in two ways – FAVR plans and mileage tracking.
Part of any non-taxable reimbursement program is a procedure for proving the business use of payments. Most organizations use some form of an IRS-approved mileage log. The most efficient mileage logs today come in the form of mobile apps that use GPS to record trip locations and mileage amounts.
These mileage apps add a new level of transparency to an organization’s mobile workforce. It is more difficult to over-report mileage amounts when using a mileage tracking app. Employee movements and work habits also become more visible to managers. This leads to three concerns and opportunities.
Micromanagement concerns
Employees do not want to be surveilled or micro-managed. At the same time, if the increased transparency surrounding their driving is accompanied by increased transparency regarding their reimbursement rates, these changes can be presented as part of a larger culture of transparency within the organization.
Privacy protections
Employees should be presented with a mileage app that places a wall between their real-time location and the later reporting of trip data. The organization extends trust by allowing them to edit their trip data before it is uploaded into the reimbursement system.
Trip data usage by management
Management should use trip data to promote healthy accountability and a growth mindset. Data from high-performing workers can be used to develop training for other employees in similar roles. Accountability will feel normal and non-threatening if there is an overall culture of transparency and trust
With these strategies in place, the FAVR plan can encourage productivity and supply data to help with workforce strategy and planning.
Using FAVR vehicle reimbursements to mitigate liabilities
Employees who operate vehicles on the job pose a specific set of risks. A FAVR vehicle reimbursement policy can be tailored to mitigate those risks.
Tying insurance verification to reimbursement to decrease company liability
The employer can be held liable when an employee is involved in an auto accident during work hours. One source of liability is the driver’s insurance coverage. If your organization has wisely required employees who drive for work to maintain high levels of auto insurance coverage, then your organization is likely protected. (A 250/500/100 coverage level is best practice.)
But how do you ensure that all employees comply with this policy? Here are the steps to take:
- Require employees to verify insurance coverage bi-annually.
Employees rely on their vehicle reimbursements. Your organization relies on the employees. It is only fair to require those who receive a vehicle reimbursement to show current proof of coverage every six months – the renewal period for most auto insurance policies.
- Make insurance verification part of the reimbursement process.
Require employees to upload their auto insurance declarations page into the reimbursement system. If the proof of coverage has not been updated for over six months, suspend reimbursement payments. Remember, insurance protects both the driver and the organization.
- Ensure that the vehicle reimbursement fully covers auto insurance costs.
The premiums for a 250/500/100 policy will cost the employee more, and should be reimbursed. A FAVR plan calculates the fixed rate for each driver based on the auto insurance coverage required by the employer. The arrangement is fair to the employee and fair to the company.
Labor code violation protection using FAVR reimbursement
One of the greatest advantages of a FAVR reimbursement plan is protection from labor code violations. Nine different jurisdictions in the United States have labor laws that require reimbursement of business expenses incurred by employees. California has one of the nation’s strictest laws, CA Labor Code, Section 2802.
Violations of this law and similar ones in other states can lead to costly fines and legal judgments.
Neither standard car allowances nor mileage reimbursements can guarantee compliance.
Standard car allowances often fall short of the legal requirements.
- Taxes often reduce payments below full reimbursement.
- Non-quantifiable payments make it difficult to prove compliance.
- A sufficient payment for some may not be sufficient for all.
Mileage reimbursement rates do not work for all types of employees.
- Non-quantifiable payments make it difficult to prove compliance.
- The mileage amount may not cover the combination of ownership and operational costs.
Because FAVR reimbursement rates are based on localized cost data applied to a standard vehicle and reimburse the ownership and operational costs separately, a FAVR vehicle plan is transparent, quantifiable, and fully compliant with even California’s strict labor laws.
Conclusion: FAVR is suitable for management and good for the workforce
FAVR vehicle plans are administratively complex. This is why most organizations outsource the plan's administration to an expert. In return, employees get a fair and transparent reimbursement system, and managers get a new set of tools to promote productivity and trust.
To explore options for a FAVR program designed specifically for your organization, contact mBurse today. Our consultative approach allows organizations to build their vehicle reimbursement program around their goals and the needs of their employees.
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