What is a Moving Expense Reimbursement Agreement?
A moving expense reimbursement agreement, often referred to as a "moving assistance agreement", is an arrangement between an employer and employee for reimbursement of certain costs related to an employee’s work-related move. Many employers, particularly large employers and employers operating in multiple states, have moving assistance policies which outline how an employee will be reimbursed for certain moving costs.
The most common form of reimbursement agreement is a fixed dollar amount "bonus based on relocation" plan. Under a typical fixed dollar amount plan, the employer offers to pay a fixed sum, e.g., $5,000, to a relocating employee in exchange for the employees promise to repay the bonus if he or she voluntarily terminates employment during a specified period of time, e.g. , one year. A fixed dollar amount plan allocates the tax costs of the structured arrangement to the employee by allowing the employee to receive the payment upfront and then deducting the amount from any future separation payments due from the employer. These types of arrangements are relatively easy to administer and very straightforward for the employer from both a statutory and tax perspective.
IRS regulations under Code Section 82 provide that ‘the value of any payment made by an employer to an employee as reimbursement or payment for travel expenses incurred by an employee in the performance of his or her services as an employee is not remuneration for services to which section 61 applies’. Despite the fact that real estate related moving expenses qualify as a deductible moving expense under Code Section 217, the IRS has taken the position in Rev. Rul. 2004-112 and Private Letter Ruling 200814008 that reimbursements to employees under a moving expense reimbursement agreement are wages subject to income and payroll withholding. This creates a potentially significant tax cost for the employer. As a result of the employer’s increased tax costs, some employers structure the moving expense reimbursement as a loan or no interest promissory note. From the employees perspective, these arrangements are generally subject to income and payroll withholding when any amount under the agreement is forgiven or repaid.
Essential Elements of a Moving Expense Reimbursement Agreement
Understanding the Key Components of a Moving Expense Reimbursement Agreement
The terms of a moving expense reimbursement agreement can differ from employer to employer, but there are some important components that an employee, especially an employee that is a foreign national, should review and understand. Below is an explanation of some of the common key components of a moving expense reimbursement agreement.
Covered Expenses
An employer may cover a variety of moving expenses, from the cost of shipping household goods, to storage fees, to travel expenses. No matter the scope of the covered expenses, moving expenses are generally subject to income and employment tax withholding, unless they are paid directly to a third party such as the moving vendor. So one factor that an employee should consider when negotiating a moving expense agreement is whether certain items are paid directly to the employee or the moving vendor. An employer may provide the moving expenses to avoid additional taxes, or to ensure that the funds are properly spent.
Eligibility
An employer may set a minimum period of employment a nonimmigrant employee must stay with the company to remain eligible for reimbursement of moving expenses. This provision is particularly important for employers looking to protect their investment in their workers. For example, an employer may be inclined to terminate an employee due to performance issues after a few months, but now the employer has the added layer of needing to ensure that any additional moving expenses paid do not need to be recouped. Or, a good employee that is getting ready to jump to another company has received a lucrative counteroffer, but under his moving expense agreement, if he stays with the employer for at least three years, his moving expenses will be paid.
Conditions
Some employers require the employee repay the costs of the moving expenses if they terminate employment with the employer prior to a specified time period. This provision gives an employee a chance to weigh all the pros and cons of accepting a moving expense reimbursement agreement. One con may be if the employee must pay the moving expenses back if he leaves the company prior to a year. But another con could be that by accepting the moving expense reimbursement package, the employee may violate the conditions of a non-compete with a former employer. If that were the case, moving may certainly not be worth it. Others factors to consider include the new position versus the old position, location of the new position, and the stability of the company and your new department.
General Guidelines
Many employers have a minimum distance that must be met for the employee to be eligible to receive the moving expense. A common minimum distance is 50 miles. Further, even if the moving distance is far enough, many employers expect that an employee’s home is moved to the new job location. An example of this would be an employer relocating an employee from Los Angeles to Atlanta to work at the Atlanta office. But under the moving expense reimbursement agreement, the employee does not move from California to Georgia, but rather from Los Angeles to Atlanta. Logically, the employer has no control over how far the employee lives from the new office. And can an employer really tie the hands of an employee to find affordable housing if the market has taken off in a city? While all of these factors are negotiable, it is important to know up front that the employer is strict about certain conditions or requirements.
Advantages for Employers and Employees
Moving expense reimbursement agreements can have mutual benefits for both employers and employees. For employers, the Agreements can help support recruitment and retention efforts. Federal contractors are facing higher costs for salaries and benefits and the competition to attract top talent in increasingly stiff. As a part of a robust recruitment package, reimbursement of moving expenses can go a long way to sweeten the deal. Employers often see the benefits of such Agreements used to bring a contractor from a remote location to a new permanent principal offices for the transition, which may be a daunting undertaking without appropriate employee incentives.
Employees also appreciate the break on the costs of moving. From hiring a real estate agent to, in some cases, paying two mortgages at the same time or paying a mortgage while homes that were intended to be an investment property stand vacant, the costs of relocating can be significant. Having a set reimbursement for moving expenses can be very helpful for employees (or potential employees).
Legal Implications and Compliance Issues
The legal landscape for moving expense reimbursement agreements is as complex as it is essential for both employers and employees. Understanding the compliance requirements and potential liabilities is indispensable for any business seeking to provide moving expense reimbursement agreements to employees, or for an employee contemplating such an agreement with his or her employer. To start, such agreements are governed by a patchwork of federal, state, and, in some cases, local laws. These laws touches on the taxation of reimbursements, wage and hour considerations, and penalties for non-compliance. The federal government imposes two distinct income tax considerations on moving: (1) limitations on deductibility of moving expenses for relocations that occur in 2018 through tax year 2025 (under Internal Revenue Code section (IRC), section 217); and (2) continuing deductibility for qualifying military members’ moving expenses (IRC section 217). In those states that have deemed moving expenses not to be part of gross income for income tax purposes, the federal changes limit the ability to deduct moving expenses after 2017, including in connection with relocations provided for in moving expense reimbursement agreements. Further, as a result of the 2017 federal tax reform, the employer-provided reimbursement payments are treated as taxable to the employee. See IRC Section 132(g). At the state level, although there is no specific statutory or regulatory authority dealing with moving expense reimbursement agreements, the general treatment of the agreement under Illinois law, as described above, holds true. See O’Connor v. Hines, 2014 IL App (1st) 123122, a decision of the First District Appellate Court. For recovery of moving costs or relocation expenses under a written agreement to be nondischargeable, the costs incurred must be in accordance with the terms of an agreement between the employer and employee and must be a loss incurred by the debtor related to the employment of the debtor. See 11 USC ยง 523(a)(5); In re McGowan, 495 B.R. 194, 197-98 (Bankr.W.D.N.C.,2013). Compliance with these laws is essential in order to avoid costly penalties, litigation, and negative publicity. Confusion and errors in design and execution arise when employers, who are themselves often not mindful of the details of the agreement, overlook obligations set out in the applicable state law. Employee missteps, such as allegations of fraud, are avoided by developing a compliance strategy based on a thorough understanding of the relevant legal principles regarding minimum wage, wage orders, reporting and payment of wages, reimbursement laws, and penalties.
How to Tailor the Agreement to Suit Your Needs
Every moving expense agreement needs to be tailored to your specific situation. A company agreement that works for a political subdivision may not work for a private employer. You will have to determine how many years you will require the employee to remain in your employ (i.e. , the term of the contract) in order to justify the costs. Moving expense allowances are justifiable when the employee moves significant distances. Large companies with many employees and new hires displaced around the country may differ in their needs from a smaller company that only hires or moves several employees every year. The agreement can also vary according to your industry needs. A manufacturing company may want to move an employee from Illinois to Michigan and have that employee report directly to work. In contrast, a financial consultant hired from out of state may require several prolonged weeks of training before he can start his work. In either case, the standard agreement can be adapted to suit your needs.
Common Issues and Solutions
While moving expense reimbursement agreements (MERAs) can be an effective way to recruit and retain new talent, or to facilitate a "stay-at-home" arrangement for an existing employee, they are not without certain challenges that employers and employees must successfully navigate.
Common Issues
The first is whether the MERA is a bonus or a business expense. Bonus payments, such as those made under retention or signing bonuses, are subject to taxation, while business expenses are not. The taxation of MERAs is based on the individual circumstances of the agreement. For example, if the employee engages in a voluntary relocation (for the employee’s convenience rather than to meet the employer’s needs), the employer’s payment likely will be considered taxable income in the form of a bonus. However, if an employer requires an employee to relocate for business reasons and agrees to cover the employee’s moving expenses, those expenses likely will be treated as business expenses and, therefore, as nontaxable.
Separate and apart from how expenses are addressed under the MERA, the agreement may be subject to state wage law requirements. For example, the California Division of Labor Standards Enforcement (DLSE) has taken the position that employers have a duty to reimburse employees for necessary business expenses and, under that duty, will require employers to reimburse employees for moving expenses incurred in the course and scope of employment.
The other common issue with MERAs is whether the agreement violates the necessary terms and conditions for enforcing a non-compete. A non-compete generally is not valid unless it is narrowly tailored to further one legitimate business purpose. Moving expense reimbursement agreements can become problematic if an employer requires an employee to relocate to a location that the employee does not wish to move to as a condition of his/her employment. Consider the MI court holding in Walsh v. Burger King. The MI court found it to be unnecessary for an employee to work in a particular location following a relocation, thus the employee was entitled to the balance of the moving expenses related to the relocation. See: Walsh v. Burger King, 648 N.W.2d 246, 248 (2002).
The mere existence of a formula within the MERA that sets out an employee’s expense-reimbursement obligation as a percentage of employee’s income should not violate a legitimate business purpose, but employers should exercise caution. A short geographical restriction on a new hire accompanied by substantial expenses could be viewed as a restraint reflecting the legitimate business interest of protecting a company’s investment in its employee.
Best Practices
One way to avoid these challenges is to include a so-called (a) tax gross up in the MERA. A tax gross up obligates the employer to pay the employee’s tax liability on the reimbursement. Likewise, the employer should take IL state laws into consideration, as Illinois does not allow for tax gross ups without express statutory authority. Employers should consider recapturing the reimbursement if the employee violates the post-employment restrictive covenants contained in the MERA. This approach offsets a significant portion of the employer’s loss, while not unreasonably inhibiting the employee’s ability to settle into his/her new position. Finally, employers should consider restricting the recovery of moving expenses to the actual hard costs of the relocation, and not include incidental costs associated with the relocation, such as lost bonuses or commissions, lost promotional opportunities and goodwill bad will.
The Future of Relocation Assistance
As businesses evolve and the workforce continues to change, the future of relocation assistance and moving expense reimbursements will undoubtedly evolve alongside. With technological advances and a digitalized world, the expectation for seamless relocations and intuitive processes is greater than ever. The growing gig economy – where employees change jobs more frequently, and the increase in remote working professionals, all present opportunities for relocation assistance programs that cater to the needs of employees. Existing and future economic and demographic trends underscore the need for flexible and adaptive relocation policies that align with the lifestyles of current and future workforce generations. To remain competitive , moving expense reimbursement agreements must also keep up with the evolving expectations of a modern workforce. As portability and flexibility become increasingly important to employees, were everything is just a few clicks away, it places the onus on employers to understand the needs of their employees. This means that relocation assistance will need to be more flexible, allowing employees to make decisions that best suit them. Graduated moving expense reimbursements as well as tiered partnerships with moving vendors are potential solutions that enable employees to utilize the services they need at a price point that works for them and their families.