When it comes to mileage reimbursement, most companies use the standard IRS mileage rate. However, many industry leaders choose instead to implement fixed and variable rate (FAVR) reimbursement programs.
FAVR programs can be one of the most cost-effective and accurate methods to deliver employee reimbursements. Today, we will discuss what FAVR plans are and the best ways to implement one for your company.
FAVR Reimbursement Plans Explained
FAVR is a type of payment allowance. It’s designed to reimburse employees who drive their own cars to conduct business for the company they work for. The reimbursements are a combination of monthly allowance and mileage reimbursement payments.
Related: Top 5 Company Mileage Tracker Misconceptions
The allowance is in place to cover the fixed costs of owning a vehicle. The mileage reimbursement is there to cover the variable costs of operating said vehicle.
What Are These “Fixed and Variable Costs”?
“Fixed costs” generally refer to things like the car’s depreciation value, car insurance, taxes, and license and registration charges. The total amount undergoes adjustments according to the amount of time the employee uses the vehicle for business purposes.
“Variable costs” refer to expenses that can change over time. This can include fuel, maintenance, and oil changes or tire changes.
How Does a FAVR Plan Work?
A FAVR program follows a very precise procedure to reimburse different types of costs. Each individual employee’s reimbursement is associated with their vehicle type and location.
The driver’s zip code determines the reimbursement. This means the driver receives payments based on their mileage and the region they live in.
Regardless of the miles they travel, each employee gets a fixed amount to cover ownership expenses. They also receive a variable amount according to mileage. Each month, the cents-per-mile rate shifts as per the local fuel prices.
FAVR Plan vs. A Standard Mileage Reimbursement Plan
When an employer uses a standard mileage reimbursement program, their mobile employees must track the mileage they incurred when conducting business. They then need to submit that information to their employer.
Related: Mileage Tracking Apps Vs. Paper Mileage Logging
The employer determines the payment by multiplying their employee’s mileage by the cent-per-mile rate the business sets. On the other hand, a FAVR reimbursement program pays not only the mileage rate but also a monthly stipend. Local vehicle expense data helps in determining both amounts.
Many companies prefer this method as it ensures accurate payments when employees live in different regions. The plan comes with location-specific rates and reimburses accordingly.
If you drive your car in NYC, your reimbursement rate will differ from a driver working in North Dakota. That’s because fuel and other related costs are relatively higher in NYC.
Comparing FAVR to Standard Reimbursement Plans
Compared to a standard mileage reimbursement plan, FAVR programs are often more accurate as they take into account actual vehicle expense data available locally. This is why FAVR programs tend to avoid both overpayments and underpayments.
To put things in perspective, employees might be spending more than they receive as reimbursement. On the other hand, their employers might be overpaying them if, for example, fuel prices have decreased.
A standard mileage plan can not only put the employee at a disadvantage. The employer might also suffer in the form of overpayments in some states. Still, some employers prefer a simpler mileage-based system instead of a highly flexible FAVR plan.
It’s worth mentioning this kind of system does not consider the varying costs, such as fuel prices. In addition to this, they may not align with the region’s prices, resulting in either underpayments or overpayments.
In a nutshell, cents-per-mile reimbursement plans are a simpler (if less accurate) mileage reimbursement method. FAVR, however, is a more customized approach that considers the individual costs of each employee and is location-specific.
FAVR Program Requirements – Can Your Company Run a FAVR Program?
When it comes to implementing FAVR, a company must meet its requirements. This is a reimbursement plan meant for companies with their workforce spread across different regions.
Your company must employ, at minimum, five drivers, and they must drive over 5000 miles for business purposes annually.
It’s also worth noting that only US-based companies are eligible for the FAVR plan. Considering that laws in Canada, as well as in Mexico, work differently, FAVR cannot provide for employees working there.
What Types of Industries Use FAVR?
Industries that will find FAVR plans as the most favorable method of reimbursement include sales executives. Their jobs often require them to frequently travel to meet with their clients.
Related: Manual Expense Reports: The Hidden Costs
Other industries can benefit as well. Healthcare professionals who often have to visit their patients’ homes will find FAVR to be very beneficial.
In addition, in the post-COVID era, restaurants worldwide have begun to thrive on delivery services. This makes FAVR a very favorable plan for them!
How Do I Implement a FAVR Program?
Developing a FAVR program can be a months-long process. The IRS provides guidelines, but, as you might expect, they’re not exactly user-friendly. Most companies looking to implement FAVR or other mileage reimbursement methods turn to professionals for support.
Our team of experts can help you choose the right type of mileage plan that will fit your business needs. Our comprehensive web dashboard and sleek mileage tracker app make reimbursements a breeze!
To learn more about how TripLog’s company mileage features can save your business countless hours of labor and thousands of dollars every year, schedule a complimentary demo. You can also visit our pricing page to get started today, or try our mileage reimbursement savings calculator.