Automotive Fleet

SEP 2013

Magazine for the car and truck fleet and leasing industry

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LETTERS TO THE EDITOR Vehicle Downsizing Doesn't Impact FAVR Reimbursement The downsizing trends certainly reduce feet costs as you suggest in the Market Trends editorial in the July 2013 issue. (See "Vehicle Downsizing has Made Company-Provided Vehicles More Competitive Against Reimbursement.") However, the fxed and variable rate (FAVR) reimbursement program, with which I'm familiar, also uses the organization's target vehicle to determine the fxed and variable (operating) expenses upon which the reimbursement rate is based. If the feet changes the vehicle type it provides and the reimbursement target also downsizes, then it would seem the comparison would remain relatively the same at the lower cost level. I've found that the feets better buying power (especially tax-exempt status) is our actual advantage if reimbursement levels will be fair to the employee supplying their own vehicle. The offset is that FAVR programs don't pay for commuting, but many feet programs end up eating that cost instead of charging fair market value to employees for that beneft. Longer holding periods resulting in lower annual depreciation also seems to favor reimbursement programs — an employee who had to drive an "old" feet vehicle would complain, but then keep their own vehicle even longer if the reimbursement program allowed it. Chris Amos Commissioner of Equipment Services City of St. Louis, Mo. Yes, Chris, you make a valid point; however, the editorial was written from the perspective of the IRS reimbursement model, as opposed to a Fixed and Variable Rate (FAVR) reimbursement model. Although FAVR was never mentioned in the article, in hindsight, I agree that we should have been more vocal in making the distinction. However, you are correct in stating that if FAVR is based on a lower-cost vehicle, the FAVR costs are going to go down as well. But, now that we are discussing FAVR, there are other issues that come into play besides cost, namely compliance with IRS regulations. For readers unfamiliar with the FAVR plan, it was established in 1992 and reimburses employees on a non-taxable basis through a combination of a monthly allowance and a per-mile reimbursement. According to IRS regulations, the FAVR fxed payment includes projected fxed costs, such as depreciation (or lease payments), insurance, registration, license fees, and personal property taxes. A FAVR plan also covers projected operating (or variable) costs, such as gasoline, fuel taxes, oil, tires, and routine maintenance and repair. To be eligible to participate in a FAVR plan, an employee must meet a number of requirements specifed by the IRS. However, not all employees can meet the non-taxable standards, so companies often administer two reimbursement plans — one taxable and one non-taxable. As a result, a FAVR plan is more complicated to implement than other reimbursement plans and requires a great deal of administrative record keeping to satisfy IRS regs to 8 AUTOMOTIVE FLEET I SEPTEMBER 2013 maintain a non-taxable payment status. Companies are required to document annual business mileage, the number of years the vehicle will be retained, model-year of the employee vehicle, vehicle's acquisition cost, and proof of employee insurance. In addition, the depreciation method used on employee tax returns must be documented by the company, and the business mile documentation must include the time, place, and purpose for which the vehicle was used. These numerous requirements to set up and maintain an FAVR program must all be met or a company can fnd itself out of compliance with IRS rules, and thus out of compliance with SarbanesOxley (SOX). Most companies rely on an outside vendor to set up and maintain an FAVR program and assume the vendor will be in compliance, but, ultimately, it is the company's responsibility, from the standpoint of the law, to be in compliance. A SOX audit typically examines the processes in place to validate the accuracy of corporate payments and ensure that calculations are done consistently and correctly. With both the setup and ongoing administrative requirements of an FAVR program, it may cause a company to become non-compliant with SOXrequirements. There are so many FAVR rules that it is diffcult to be compliant with all of them. Companies are always chasing after data from employees to make sure they remain in compliance. Many corporations perform an audit of its FAVR plan and discover they are not in compliance with IRS regulations. One area to audit for compliance is the IRS regulation specifying annual business mileage. To participate in an FAVR program an employee must travel a minimum of 5,000 annual business miles. Can you verify each year that the employee is over the 5,000 miles of minimum business use by the end of the year? If you can't, this may be a SOX issue, not to mention an IRS issue as well. Another issue is employee insurance. FAVR rules require employees to maintain insurance on the vehicle. Although you may verify insurance coverage at the start of the program, can you verify that an employee didn't cancel the insurance at a later time? What internal processes and procedures do you have in place to ensure this doesn't occur? This would be a question posed in a SOX audit. The issue of eligibility is another potential concern about noncompliance with IRS regulations. According to the IRS, at no time during the calendar-year may a majority of the employees covered by a FAVR allowance be management employees. Do you have processes in place to monitor this requirement? The IRS states that failure to meet one or more of the requirements in Section .08 of the IRS revenue procedure means an employee may not be covered by a FAVR allowance. -— Editor

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