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Are Tax Gross-ups Worth It?

As we know all too well, the tax implications of relocating employees is significant. With the exceptions of household goods moving, 30 days of storage, final move expenses and compliant home sale programs, many relocation benefits are taxable to the employee. Further, not only must you treat the other expenses as income to your employee, you must also treat any tax assistance for covered benefits as taxable income as well. 

So, at one point, a brilliant accountant came up with the concept of the gross-up, where employers pay the transferee’s anticipated tax exposure, as well as the additional tax exposure from paying the tax exposure, until the anticipated tax impact is negligible. Needless to say, gross-ups are among the most costly benefits in a relocation program, second only to home sale and, possibly, the household goods shipment.

There are typically four gross-up methodologies: supplemental, marginal, making a transferee whole, and a combination of methods.  The marginal approach is the easiest and most equitable method for all transferees. However, for some employees, it might not be adequate to cover the same exposure as other employees with the same benefits.

In addition to the significant cost of gross-up, it is not as glitzy as other more tangible benefits such as temporary living, rental assistance and spousal employment assistance.  That’s why employers wrestle with the necessity of this form of assistance.  But, the taxation is a very real expense for the transferee and the IRS expects their payment at the time of the taxable event.  So, employers have one of two options in expenses that are reimbursed to the employee: gross-up the expense or withhold the taxes from the reimbursement (paying them short of their expenses).  This gets complicated, however, when benefits are directly billed by the vendor to the company or their service partner.  Unless your employee is willing to write you a check or have the taxes removed from their pay, without gross-up assistance, direct billing is not a viable option.

Another area complicated by grossing-up occurs in capped budget programs. If your company strictly adheres to budget caps, you know the headaches that come toward the end of the program when the household goods bill or home sale expenses have not yet been finalized.  The best solution for this is to treat tax assistance outside the budget cap.

Finally, lump sum programs have also brought gross-ups into question. If your program includes a lump sum allowance, you must be sure to spell out to the transferee if the amount to be paid will be grossed-up or paid net of taxes.  This is important for them to understand at the outset.

Ultimately, whatever your approach, gross-up considerations must be addressed. And so the answer to the question posed in the title of this post is a resounding “yes!” Gross-ups are worth it and every bit as important as the actual relocation expenses.

Image courtesy of Salvatore Vuono / FreeDigitalPhotos.net

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MIKE CANNING
VP, Client Services

RICK CALANNI
VP of Business Development Northeast Region

 

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