January 1, 2018 ushered the relocation industry into a brave new world.  The US Tax Cuts and Jobs Act (TCJA) went into effect on that day, which suspended the excludability of qualified moving expenses for non-military domestic relocations.Even before the Act went into effect, cost containment pressures on mobility were intense, and a consequence of the TCJA is that relocation costs increased for companies that grossed up the formerly excludable items. (Recent industry surveys indicated that the majority of companies are grossing up those formerly excludable items.)  As a result, the pressure to contain costs continues unabated even though the TCJA reduced the corporate income tax, which was touted as an offset to those increased costs.  

Repayment agreements are one strategy companies can use to help contain mobility costs.  The agreement’s concept is pretty simple:  the company protects its return on investment on relocation because the employee promises to repay the company for any incurred relocation costs if he/she leaves the company’s employ before a certain point in time.  This can mean voluntary terminations as well as terminations for cause.  The most common time frames for repayment are 1-2 years, with an average repayment term of 18 months, per Worldwide ERC data.  Repayment terms vary, though most companies will require 100% repayment if the employee leaves within the 1st year.  

The TCJA does affect repayment agreements, depending on when the employee leaves the company.  Terminations during the current relocation year are not a problem – the company simply adjusts the employee’s payroll and withholding taxes for the repaid expenses; the employee has no available deductions.  But prior to 2018, employees who terminated during a subsequent year would have been able to deduct the repaid 2nd year moving expenses as an employee business expense.  Under the TCJA, that deduction is no longer available.

Despite this tax law change, the recommendation to include a repayment agreement in the mobility program remains.  Given current talent shortages, an employee’s decision to leave a company may not be affected by the absence of a deduction, though a tax-savvy employee may delay the decision to leave (if possible) to avoid the increased financial pain of the repayment requirement.  However, this delay can help the company realize or even increase its return on mobility investment.

NOTE: companies should always seek to enforce repayment agreements as there can be complex and expensive consequences of repayment forgiveness.  The IRS views the forgiveness as wages, and as such subject to withholding and employment taxes.  If the employee has terminated employment with the company, there is no source from which to withhold and collect FICA.

This article was posted on following categories: Relocation Trends