Not a Member?  Become One Today!

HR Magazine, September 2002 - Focus on Benefits: Detail Your Auto Policy

By Carolyn Hirschman  9/1/2002

HR Magazine, September 2002 
Vol. 47, No. 9

Before dolling out cars or cash, consider your buisness needs and tolerance for red tape.

A company car or car allowance may be the Cadillac of fringe benefits from an employees perspective, but to the employer, these perquisites can represent miles of red tape and potential roadblocks.

In spite of the hassles, some workplaces see company cars as a necessity (think traveling salespeople). Others offer them only as a perk for chief executives and top managers, or as a recruiting and retention tool in competitive industries. Some choose to compensate employees in other ways for business travel.

Employers that want to offer business vehicle perks have three options. They can:

  • Lease or buy vehicles for certain employees.
  • Pay allowances for work-related automobile expenses.
  • Reimburse employees for on-the-job use of personal cars.

Tax law changes have decreased the popularity of the first two choices.

It used to be a nice perk, but many companies have moved away from offering a company car or a car allowance in favor of just reimbursing the individual a flat rate per mile, says Jerry Hay, CFO of the Society for Human Resource Management (SHRM). As long as the reimbursement rate is 36.5 cents per mile or less, there is no taxable income to the recipient. With a company car or a car allowance, the company has to add the personal portion of the auto use to the individuals W-2 at year-enda hassle many companies want to avoid.

But some employers continue to offer some sort of assistance for business vehicle use. SHRMs 2002 benefits survey shows that 26 percent of employers offer company cars (up from 24 percent in 2001), while 54 percent offer auto allowances or reimburse workers for expenses (up from 49 percent in 2001).

If your company is thinking about adding a vehicle benefit, how should you proceed? Some experts recommend asking employees which option they prefer. But HR should be aware that liability concerns and Internal Revenue Service (IRS) requirements vary for each choice. Choosing the most cost-effective plan requires a careful analysis of your companys needs, assets and risk tolerance. You should carefully consider all available options as well as the administrative burdens of eachincluding program management, financing, insurance and taxabilitybefore making your decision.

Once youve decided whether to provide cars or allowances or to reimburse employees for business use of their own cars, you still have work to do. HR should then draft a vehicle policy that spells out both the company and employees rights and responsibilities.

Company Cars
Some companies, such as drug manufacturers, provide cars because its part of their culture to do so, says Lee Czarapata, vice president of operations for business vehicle services at Runzheimer International, a business-travel consulting firm based in Rochester, Wis.

If youve decided to provide vehicles to employees, you also must determine which type to offer. Passenger sedans are by far the most common type of vehicle used in business, though pickup trucks and sport utility vehicles have gained in popularity since 1998, according to a 2000 Runzheimer survey.

One advantage to providing a car outright is that employers can better control factors such as the age, type, reliability and safety of vehicles that its employees drive while conducting business. Many firms with sizable fleets let employees choose from a list of approved vehicles, which are then purchased or leased at a discount through outside fleet management companies.

For some employers, business vehicles can boost or undermine the image they want to portray to customers. But the use of company cars as status symbols has decreased due to lower bottom lines and stickier federal tax regulations, which treat some company cars as taxable compensation. These days, employersespecially large businesses in competitive industriesuse cars chiefly as recruiting and retention tools.

Thats true in the pharmaceutical industry, which must compete for sales representatives. They want to make sure they retain the people they spend a lot of money training. A car can be a differentiator, says William McDade, senior vice president of strategic relationships at PHH Arval, a fleet management company based in Hunt Valley, Md.

For example, Aventis Pharmaceuticals Inc. maintains a 5,500-car fleet for its field sales reps, managers and directors. Our fleet drivers are very passionate about their vehicles and appreciate having a company-provided vehicle, says Josie B. Sharp, fleet manager for the French drug manufacturer, which has 10,500 U.S. employees.

Employers that choose to provide cars also must decide whether to lease or buy the vehicles, a financial decision that depends on an organizations cash flow, accounting method and tax rate as well as the available financing terms and the vehicles expected useful life. In 2000, the average corporate fleet had 45 leased and 19 owned vehicles.

Leasingthe most popular optionminimizes employers cash outlays for vehicles and keeps assets off the balance sheet, thus lowering debt and making it easier to borrow money for other business-related investments. The vehicle owner covers vehicle registration, taxes, insurance and other administrative costs. On the other hand, ownership may be a better choice for cash-rich employers that can finance purchases out of cash flow or at low interest rates. Generally, both leasing and ownership costs are deductible as business expenses.

There are two leasing options. Retail leases offer low interest rates but often impose annual mileage restrictions, which, if exceeded, can cost a bundle. For companies with large fleets and high-use vehicles, a better deal may be commercial leases, which carry higher interest rates but have no restrictions. Keep in mind that many leases cannot be canceled and impose stiff penalties for early termination.

Whether leased or purchased, the IRS considers an employer-provided car a working-condition benefit that is necessary for job performance. Documented business use of these vehicles is not subject to federal income, federal unemployment, Social Security or Medicare taxes for the employee, but personal usesuch as commuting and driving on vacationis.

Therefore, HR should instruct employees to keep logs showing each trips date, purpose and number of miles driven, indicating which is for business and which is personal.

The employer must have a reasonable belief that employees are keeping car logs, says Mary Hevener, a tax partner at the law firm Baker & McKenzie in Washington, D.C. Its unclear exactly what that means. Its never been tested [in court].

Employers should keep all car records for at least three years in case of audit. The IRS provides guidelines on how to value leased and owned cars and how to note related compensation on employees W-2 forms. Employers who cannot produce pertinent records could be subject to financial penalties.

Another caveat: An employer is liable for the cars it provides to employees around the clock, even when theyre used for employees personal business, says Ric Cavallero, vice president and general manager of Columbia Fleet Management in Beaverton, Ore. Therefore, adequate insurance coverage is a must.

Most large employers self-insure fleets for physical damage from accidents, theft and vandalism but cover liability (bodily injury and property damage to others), which can be more costly, through general corporate insurance policies. Employers with relatively few vehicles and potentially lower risk buy commercial auto insurance that, like individual auto policies, offers lower premiums in return for higher deductibles. The premiums are more expensive [than individual premiums] because theres more exposure, says Pat Norris, commercial lines manager at David G. Sayles Insurance Services in Glen Rock, N.J.

To determine the right level of coverage, assume two accidents per month for every 100 vehicles, with each accident costing $1,100 to $1,500, says Vince Gordon, vice president of sales at Automotive Resources International, a fleet management firm headquartered in Mount Laurel, N.J. Financing agreements often require certain amounts of coverage, he adds.

Car Allowances
Some companies either dont need to own a fleet of cars or dont want to deal with the hassle. These companies, especially small ones, often choose to pay employees a fixed monthly amount to obtain and operate their own vehicles.

A lot of companies are getting away from company-supplied vehicles and are going to car allowances, says Cavallero.

One advantage of this option over company cars is that allowances reduce employers liability: The company is held liable for personal cars only during their business use.

But there can be a downside to giving allowances to employees to purchase cars: Unless the employer sets requirements, nothing prevents an employee from using the allowance to buy a 10-year-old beater and pocketing the rest of the cash. Employers should set standards both to protect their image and to ensure the safety of vehicles used at work.

Keep in mind that car allowances can be taxed, depending on whether they are set up as accountable plans or nonaccountable plans.

Under an accountable plan, in which workers track business vs. personal use, employees must return to employers the portion of the allowance spent on personal use; the rest is not considered wages and is not subject to income tax.

Under a nonaccountable plan, in which workers do not document exact use of the cars, allowances are considered supplemental wages subject to taxation. Employees who itemize can deduct from their personal income tax the business-related portion of the allowance, limited to 2 percent of adjusted gross income.

Most companies use accountable plans, says Jacob I. Friedman, a tax attorney at Proskauer Rose LLP in New York. It avoids the need to show the amount under the [tax] return. It avoids withholding and FICA. Its the easiest and simplest way.

Reimbursement
For employers whose workers use cars only occasionallysay, less than 5,000 miles per yearor have no contact with clients, the simplest option is to reimburse them for using their own cars on the job. Keep in mind that reimbursing high-mileage drivers, however, can cost more than actual auto expenses, Czarapata says.

Employers may offer per-mile reimbursement (this years IRS rate is 36.5 cents) or a monthly amount based on the IRS complex fixed and variable rate (FAVR) method, which Runzheimer says is more accurate. FAVR combines fixed costs, such as insurance and depreciation, and variable costs, including gas and repairs.

Runzheimer plans also factor in geographical location. For example, annual vehicle expensesincluding fuel, oil, maintenance, tires, insurance, depreciation, financing, taxes and licensingare highest in Michigan, New Jersey, Massachusetts, Rhode Island and California, according to Runzheimer. Costs are lowest in Alabama, Vermont, Iowa, Tennessee and South Dakota. The average annual costs from state to state can vary by as much as $1,500.

Reimbursements to drivers are not taxed as compensation; employers can deduct reimbursements as business expenses.

Workers who use their cars at work must buy their own insurance. Employers should bear in mind that, regardless of who owns and insures the vehicle, they are liable for accidents and damage that occur when the vehicle is used for business.

Rules of the Road
No matter which option an employer chooses, any company that provides vehicle benefits, especially company cars and car allowances, should develop a policy covering eligibility, restrictions on use, responsibility for maintenance and repairs, and accident follow-up procedures.

These documented procedures are the companys official communication to employees and its defense against insurance and legal claims. You dont want to make spur-of-the-moment decisions on that days problem, McDade notes.

For example, the policy can restrict who may drive a company car. Most vehicles go to the employees who need them most, such as insurance adjusters and service technicians. Use by employees family members is at the companys discretion.

Employers also can restrict vehicle use to work hours, though many firms provide cars 24/7. The less personal use of cars the better, some believe, to reduce both wear and tear on vehicles and employers liability. But limited personal use, such as driving to lunch or commuting to a work site thats closer to home than to the office, makes sense.

Another liability defense is to regularly verify all drivers licenses and screen their driving records. Regular vehicle maintenance also helps.

In addition, a safety program, consisting of classroom and behind-the-wheel education, can improve drivers habits. Aventis, for instance, gives drivers a day of safety training and provides a safety kit in each company car.

In addition to providing firm guidelines, HR must be clear on the consequences of policy violations. Penalties can range from the loss of the car to termination, depending on the severity of the employees action.

Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.
Copyright Image Obtain reuse/copying permission
 

 Related Resources

 

Estimated Annual Costs for Selected 2002 Model Vehicles

Web Links: Runzheimer International and Business Owner's Toolkitinformation about business vehicle policies.

Web Links: International Revenue ServiceFor details on tax considerations, see IRS Publications 17, 463, 463 Supplement and 535, and Form 2106.