Relocation 101

Agenda• Welcome / Objectives

• History of Relocation

• It’s all about the TAXES

• U.S. Home Sale Programs

• Policy Structure

• Typical U.S. Benefits

• Typical International Benefits

• Relocation Costs and Pricing

• Household Goods

• Q&A

Why Does All This Exist?• Expertise• Scalability• Compliance• Savings

How much time do you devote to relocation?

History of Relocation

History of RelocationPost World War II growth and prosperity fueled increase in

employee relocations

Late 60’s & 70’s, mobility among corporate employees increased due to need to attract and retain talent

40’s, 50’s & early 60’s, corporations offered limited benefits• Van lines dominated

relocation market• Relocation industry became “specialized”• Multiple products developed to manage

cost, tax consequences and impact of relocation on employee productivity

Recent History• New issues during 70’s and 80’s– Home sale not a taxable event – Cost of living allowances (COLAs)– Loss-on-sale assistance

• Environmental issues– UFFI, Asbestos, Mold, Radon, Lead, etc.

• Personal issues– Non-traditional family structure/households,

dual-income, dual-career– Increase in number of female employees– People did not have to move to stay employed and

expected more support from HR

Recent History• Corporate issues– Mergers, Acquisitions and Downsizing

• Especially in HR functions

– Diversification and Specialization– Difficulty retaining relocation expertise in HR

or “in house” (outsourcing)• All these issues contributed toward the need

for managed relocation programs• Tax benefits were derived by utilizing for home

sale outsourced programs

Present• Managed program utilizing third party provider• Tax benefits of outsourced home sale programs• Global Mobility – Global Economy

• Change in workforce • Competition for talent • Regulations and compliance• Technology• Widespread real estate declines

– Negative equity for employees

Relocation and Taxes

Non-Taxable Relocation Expenses • Household Goods (HHG)

Transportation of HHG and personal effects:– Valuation Insurance– Packing and Crating – labor and materials– Disconnect / Reconnect of standard

household appliances– Pets– Vehicle shipments– First 30 days of storage

Non-Taxable Relocation Expenses • Final Move – Cost of traveling from former home

to new home by the shortest, most direct route:– Transportation for employee and family– Lodging for employee and family– Mileage at the current IRS moving rate

• Tax Protected Home Sale Programs Revenue Ruling 72-339 and 2005-74

– If employer buys a home for fair market valuein a bona fide purchase from employee, the costs are not taxable to the employee

Conditions• In order for expenses to qualify as relocation

moving expenses the following conditions must be met:

Move must be made in connection with commencement of work in destination location

Moving expenses must be reasonable & incurred within one year of employee reporting to work at destination location

Employee must be full-time for at least 39 weeks during the first 12 months after arriving in destination location

Distance from employee’s former home to new work location must be at least 50 miles greater than distance from employee’s former home to former work location

Taxable Benefits

EVERYTHING ELSE

Home Sale Programs

• Revenue Ruling 72-339 and 2005-74

• 72-339 states that if employer buys a home for fair market value, in a bona fide purchase from employee, the costs are not taxable to the employee

• 2005-74 confirms earlier ruling and clarifies the conditions

Home Sale Programs

Home Sale Programs• Developing a Home Sale program that produces

two distinct and separate sales, will allow the costs for that sale, normally paid by the seller, to be paid by company without a tax consequence to the employee

• To provide guidance to the industry, the Worldwide Employee Relocation Council (WERC®) developed a list of conditions that should be present – 11 Key Elements (handout)

Home Sale Programs• If employer pays more than fair market value

for the employees home, the amount above FMV is taxable to the employee

• When the company assumes little or no risk (waiting until day of closing to acquire home) in selling the home it violates the tax rules and all expenses become taxable to the employee

Home Sale Two-Step Transaction

Transaction #1Transferee Graebel (Buyer)

Transaction #2Graebel (Seller) Third Party Buyer

Recording / Deed Cost – transfer tax (dual deed states)

No cost for Deed in Blank

Inspections

Appraisals

Closing Costs

Commission

Recording / Deed Cost – transfer tax

Home Sale Program ComparisonDirect Reimbursement

• Transferee provides proof of costs associated with home sale• Employer reimburses costs to employee• Employer usually provides employee tax equalization (gross-up) reimbursements

to net reimbursed amount (on avg., 60% of the original expense)

Buyer Value Options “BVO”• Transferee lists home with an approved agent • Employer/Relocation Provider(RP) purchases the home from employee at

a price equal to the outside buyer offer• RP completes the closing transaction with the outside buyer

Guaranteed Buyout Option “GBO”• Similar to BVO, with the addition of independent appraisals to

define the home’s value • At an agreed upon time (per policy: immediate, 90 days after listing, etc.),

Transferee can accept the appraised value offer; the RP acquires the home, then markets it to outside buyers

Driving Employee-generated Sales

Policy Best Practices• 103

% List price cap

• 1% refurbishment allowance

• Home inspections

• 1 Appraisal

Real Estate Agent Selection• Best

qualified- no set network affiliations

• Relocation savvy

• Require 2 BMA’s

Pricing Staging Incentives• Prici

ng strategy

• Staging to enhance

• What incentives are being offered?

Ongoing Marketing Strategy• Twic

e monthly updates

• Regular communication with agent and employee

• Dedicated expert coaches for Consultants

Thorough Review of Offer to Purchase• Ever

y contract is reviewed by Consultant and signed off on by manager

Buyer Qualifications• Buy

ers must be pre-approved

• Proof of funds to close verified

• If buyer not using national lender required to be approved

Manage the closing process• Reg

ular follow-up on contingencies

• Tight management of closing dates

Successful

Closing

Relocation Policies

Policy Types• U.S. Domestic

– Lump Sum

– Lump Sum +

– Renter

– Homeowner (DR, BVO, GBO)

� Executive

� Short Term Assignment

� Commuter

� Intern

Policy Types• International Policies (Worldwide or Regional):– Long-term Expatriate Assignment

– Short-term Expatriate Assignment

– Permanent International Relocation

– Expat “Lite”

– Local or Local-Plus Package

– Extended Business Traveler

– Rotational Assignment

– Commuter Assignment

Which Policy to Use?• Understand the business needs• Understand the staffing needs• Understand the potential costs

The most successful programs are tax compliant, immigration compliant,

and support the assignee and family

Best Practice Policy DesignTAX CompliantReflects Corporate CultureSupports Company’s Strategic GoalsMeets Needs of Employer and EmployeeCompetitive and Cost Efficient Immigration compliantU.S. policies: Maximize tax treatment of non-taxable benefitsWell-written, easy to understand with asummary of benefits

Benefits

Typical U.S. Domestic Benefits• Pre-Decision Services• Home Finding Assistance• Rental Assistance• New Home Purchase Assistance• Mortgage Assistance• Cost of Living Adjustment (COLA)• Temporary Housing• Duplicate Housing Reimbursement• Lump Sum Allowances

Typical U.S. Domestic Benefits – cont.• Home Marketing Assistance• Home Sale Assistance• Home Sale Incentive• Loss-on-Sale Assistance• Movement of Household Goods• Storage of Household Goods • Final Trip to Destination• Miscellaneous Expense Allowance• Spousal and/or Family Assistance• Tax Protection-Gross-up

Typical International Pre-Assignment Benefits

• Candidate Selection• Cost projections• Language/Cultural Training• Visa and Immigration• Disposition of Home Country Property• Pre-Assignment Trip• Spouse Assistance • Miscellaneous Expense Allowance

Typical International Pre-Assignment Benefits, cont.• Destination Services– Area Orientation– Home finding– Settling-in Assistance– School Search

• Household Goods Shipment

• Permanent Storage• Final Trip• Temporary Living• Expense Processing

Typical On-Assignment Benefits

• Recurring and non-recurring Expense Processing• Tenancy Initiation and Management• Home Country Property Management• Tax Return Preparation

Typical International Repatriation Benefits

• Departure Services• Household Goods Shipment• Temporary Living• Intercultural Training• Expense Processing• Localization – if not returning to the

host location or going on another assignment

Global Mobility Terms• Balance Sheet Approach to Compensation• Compensation Accumulation• Above Base Pay Allowances

– Housing, COLA, education, transportation hardship premium, foreign service premium housing norm

• Tax Equalization • Hypothetical Tax• Shadow Payroll / Split Payroll• Totalization Agreement

Value-added Services• Best Practice Recommendations• Policy Benchmarking• Policy Development• Budget and Accrual Reporting • Exception Reporting• Expense Accumulation for Tax Purposes• Payroll Data Feed to Client• Supplier Management of Client Vendors

Domestic Relocation Costs Today

HHG Move; 14%

Home Sale, 44%New Home

7%

Temp Living 11%

Gross-Up 14%

Home Find-ing 2%

Miscellaneous 6%Final Move 1%

Relocation Fees 1%

Full Service Relocation Average Cost $93,000

HHG MoveHome SaleHome PurchaseTemp LivingGross-UpHome FindingMiscellaneousFinal Move3rd Party Fees

Industry Revenue Stream: DomesticCategory Revenue Source Supplier

Mark-upReal Estate Agents Referral Fee / Membership Fee No

Household Goods Discount / Move Management Yes

Temporary Living Annual Marketing fee / Per night Typically

Mortgage Services Lender Junk Fees TypicallyInspections Per Service TypicallyAppraisals Per Appraisal TypicallySpousal Assistance Per Order TypicallyFunding Interest on Funds NoAffinity Programs Per referral No

Domestic Revenue Stream: Broker Referral

Real Estate Referral Revenue $300,000.00 Sale Price

3% Seller’s Agent Percent $9,000.00 Agent’s Total Commission$3,150.00 35% Relocation Company’s Referral Fee

Real Estate Referral Revenue $320,000.00 Sale Price

3% Buyer’s Agent Percent $9,600.00 Agent’s Total Commission$3,360.00 35% Relocation Company’s Referral Fee

Sale of Old Home

Purchase of New Home

Total Revenue Collected = $6,510.00

Why Home Sale Programs

Assignment Management Costs

Company Foreign Tax Costs 72.77%

Home Finding / Settling In 1.31%

Home Sale (Employee Costs) 1.35%

Graebel Fees 2.00%Temporary Living 3.40%

Household Goods 3.85%Company US Tax Costs

6.64%

Tenancy Management 8.17%

Allowance 14.18%

Sample Client

Category Revenue Source Invoice Mark-up

Household Goods Discount Percent / Direct Owned Typically

Temporary Living Annual Marketing Fee /Per night Typically

Destination Services Owned / Per order Typically

Housing Per referral No

Language Training Per order Typically

Intercultural services Owned / per order Typically

Spousal Assistance Per Order Typically

Funding Interest on Funds Typically

Industry Revenue Stream: International

Domestic Household Goods• Second Largest Expense after Home Sale• Competitive, Low Margin Category• Today’s Reality– Capacity Restraints– Pricing Restrictions– Mergers

Domestic Household Goods

• Industry has been deregulated since 1980– Introduction to discounts and contracts

• 2007 marked the end to standard pricing– Introduction to van line specific tariffs

Household Goods Pricing• Domestic– Understanding Pricing Today

• All pricing is still tariff based• Comparing pricing between carriers more difficult today• Discounts don’t tell the whole story• Driver shortage will impact pricing in the future

– Outsourced Model• Pricing determined by the provider• Fees may apply • Consistency in service and pricing year round

– Direct Van Line Relationship Model• Pricing negotiated with the van lines directly

What do all these things have in common?

International Household Goods

“He’s Going to Mumbai Not Mars. . . Why is this So Complicated?”

• Shipment Types• Surface (Sea or Truck) • Air

• Understand Requirements of Destination Country• Ocean container allocation “perceived” and

real shortages• Custom exams on the increase

Household Goods Pricing

• International– Understanding Pricing Today

• Pricing is complicated; understanding the jargon can be difficult• No governing tariffs or regulated pricing guidelines• Volume of your provider matters not your volume of shipments• Rely on the expertise of your provider

– You Get What You Pay For• The correlation between service and price plays in

International more so than Domestic• Rely on the expertise of your provider to understand

your policy and program