Looking to Benchmark Pay?
Company Assistance Plans
Employers have developed a number of relocation services to make the selling process easier on the employee. Some of those services are:
- Direct reimbursement
- Guarantee-against-loss programs
- New-home loans
- Home purchase plans
- Advancing equity
Direct reimbursement
Direct reimbursement is the simplest form of assistance to the employee.
Here’s how direct reimbursement works…
The employee is responsible for selling their house. The company pays for some or all of the costs the employee incurs when selling the home. The biggest cost tends to be the real estate agent’s commission. Plus, there are usually closing costs associated with a home sale (for example, title searches, inspections, and transfer fees).
Companies should establish clear policies detailing the expenses that are and are not reimbursable when selling the home. Transparent communications and a "high-touch" case management process will remove the element of surprise and alleviate stress from the process.
For instance…
Ella is selling her home because she’s being transferred from Missouri to California. A termite inspection on Ella’s home revealed some necessary repairs. Are these required repairs classified as a selling expense?
Ella has already purchased a new home in California even though she hasn’t sold her home in Missouri. She can’t possibly afford the money necessary for the repairs revealed by the termite inspection. Ella’s employer has agreed to loan her the money for the repairs.
Companies may make such loans from their own funds or from other sources. Loans for this purpose are ordinarily interest-free or at a reduced interest rate, and for a specified length of time (usually a short period to encourage the employee to sell the current home).
Q: How much should a company loan an employee?
A: It depends on 2 things:
- probable selling price
- the amount of equity the employee would have in the home given that price
The probable selling price is determined by having an appraisal done on the house. (This topic will be covered later in the course.) If the first home doesn't sell before the second home is purchased, there's further expense with double mortgage payments (including taxes and insurance).
Unfortunately, a direct reimbursement program creates a tax liability for the employee because payment of these costs by the employer is considered income to the employee. In the case of a zero interest or low interest (below market) loan, the IRS considers the difference between such an arrangement and reasonable interest to be imputed interest income and therefore taxable to the employee. There's also a potential problem with Sarbanes-Oxley if loans are made to executives interest-free or at rates lower than the prevailing market rates. In these cases, the IRS may view the loan as disguised compensation and taxable, especially if there is no formal repayment schedule, and include it in its consideration of reasonable compensation paid to the executive.
Q: What if an employer wants to include the cost of these taxes in the expenses they pay?
A: They "gross up" the reimbursement check by the amount of the tax to be paid. Therefore, the net amount with taxes taken out equals the amount of the net expenses to be paid to the employee.
Memory Jogger
If an employer makes a zero-interest loan with an unspecified payback period to an executive to pay for expenses incurred in selling the employee's home, that loan is very likely: