Fixed & Variable Rate (FAVR) builds resilience to rising fuel costs

Mobile sales teams and their employers are spending more due to elevated energy prices. FAVR programs can help.


Summary: Mobile sales teams and their employers are spending more due to elevated energy prices. FAVR programs can help.

The problem:

Gas prices are at historic highs. Sales teams are paying more to drive. 

Sales people are smart. If they are not properly compensated for the business use of their personal vehicle, they will be unwilling to drive for work. Fixed rate programs do not keep up with volatile gas prices. A taxable car allowance can end up costing sales people hundreds out of pocket every month.

This not only discourages employee productivity, but can also cause tax and reimbursement compliance issues for the company. {read more}

The solution:

Fixed and Variable Rate ("FAVR") reimbursement programs are flexible solutions: the variable cost of gas is addressed by the variable reimbursement rate on the program. This flexibility protects sales teams when prices go up, keeping them happy on the road. It also insures companies against overpaying when fuel costs normalize.

The flexibility of FAVR allows companies to economize when gas prices are low. It also lets companies provide regional reimbursements, i.e. pay Gulf Coast gas costs to Texas sales teams, where prices are low, and only California prices for California reps.

FAVR cares. Cardata pulls regional data so sales reps get reimbursed for their actual gas costs. (1)

 

Read on to learn more.

How are fixed and variable rate reimbursements and rising gas prices related?

Fixed and Variable Rate ("FAVR") reimbursement programs pay drivers back for the business use of their personal vehicle.

A FAVR program reimburses for fuel: it is one of the variable expenses incurred while driving for work. FAVR is flexible, in that it allows the variable reimbursement value to change every month. Therefore, drivers on a FAVR program are eligible for increased reimbursements when gas prices increase.

This means they get reimbursed for the actual expense of driving for work.

How do FAVR programs compare to taxable car allowances during inflation?

Taxable car allowances are unable to handle fluctuating fuel costs. A taxable car allowance is a fixed sum paid per month with paychecks to employees. For example, $700 paid per month to an employee to supply and drive their own vehicle for work.

Taxable car allowances are problematic because they have no internal mechanism to recognize shifts in gas prices. They are not based on data: they are arbitrary sums, generally determined by companies based on guesswork and tradition.

Without data, they cannot be intelligently regional like FAVR programs. That is, drivers in Texas will be paid the same as drivers in California (where vehicle costs are far higher).

Also note that they are, obviously, taxable, which means drivers do not take home the complete promised sum.

Paying a taxable car allowance is always worse than reimbursing employees with a FAVR plan, but especially so during periods of wild fuel cost fluctuation. Business mileage should be reimbursed accurately, and reimbursements should have the ability to adapt to changes in the price of driving.

A FAVR plan beats taxable allowances because:

  1. A) it is tax-free and IRS-compliant, so drivers take more home;
  2. B) it has a burden of justification to the IRS, so it has to rely on data;
  3. C) part of it is a variable reimbursement that can increase to match increasing driving costs.

Building a FAVR program in-house is hard. Outsourcing it is easy. Click to learn more about Cardata's FAVR programs.

How does FAVR compare to the IRS standard mileage rate when gas prices are going up?

Every year, the Internal Revenue Service sets a mileage reimbursement rate. This year, it was set to $0.585. It is unusual for this rate to change mid-year—though it did increase by 4¢ in the middle of 2011.

Whether or not the IRS standard mileage rate changes mid-year, FAVR is still better prepared to reimburse for fluctuating mileage expenses.

The standard mileage rate is a flat rate repaid to employees for every mile they drive. The Internal Revenue Service has to take an average of what it costs to drive in all regions of the country, in all vehicle types.

That means, no matter what car you drive, and no matter where you are driving, when you are reimbursed at the IRS mileage rate, you get $0.585. A rep driving an F-150 in California is receiving the same reimbursement as a rep driving a Toyota Prius in Texas.

FAVR, by contrast, has two independent reimbursement rates—fixed and variable. The "fixed" is a flat rate that reimburses for these fixed expenses: depreciation, insurance, license fees and taxes. The variable rate changes monthly and reimburses for fuel, maintenance and repairs.

So, because the variable rate can change every month, it can quickly respond to price hikes. In today's inflationary environment, this can be a life-saver for drivers.

FAVR programs are also regionally flexible. If you are in California, you get reimbursed for the extra high gas prices there. FAVR programs are based on the actual cost of driving.

How are variable rates determined?

To run a FAVR program properly, you need fuel price data. At Cardata, we gather as much fuel price data as possible before determining the rates on our FAVR programs.

This fuel price data comes from locations all across the United States and Canada. This breadth allows us to provide accurate FAVR reimbursements based on every driver's zip code.

Gas costs less in Texas than it does in California. Accurate regional data allows employers to economize on the delta, while also guaranteeing higher reimbursements to drivers in more expensive zip codes.

How does Cardata actually reimburse for gas? We wrote an article about this recently. We reimburse for gas one month in arrears, so we can collect enough data on daily prices for different regions, and give drivers the most accurate reimbursement.

So, what is driving up gas prices?

Energy prices in general are on the rise. The average price for a gallon of mid-grade gas, at the time of writing, is $4.50.

Diesel fuel, too, is up. A gallon costs more than $5.00 at the time of writing, up from a January price of $3.60.

Natural gas and electricity prices are also expected to have a volatile year.

Prices of gas were already rising as pandemic restrictions began to lift globally. Energy usage was down during the pandemic because people were traveling less and businesses were closed. As travel and normal business resumed, demand increased beyond the immediately available supply, driving prices up.

Then, the geopolitical situation worsened. Russia is a primary global energy supplier, the third greatest oil exporter, and their barrels have been widely banned and boycotted, causing further shortages. In fact, Russia supplied as much as 8% of US oil—and far more to European customers.

The US no longer imports Russian oil, meaning that 8% gap has to be provided from a smaller supply pool.

A higher price for a barrel of oil means a higher price for motor fuel, since crude oil is the most expensive component of gasoline. Increased demand for fuel, existing supply chain disruptions, and now limits on Russia's exports, have created the perfect storm for rising oil prices.

What can be done?

If you pay a taxable car allowance, or you reimburse your sales teams at the IRS standard rate, switching to FAVR will protect them against rising gas prices.

This is especially important if you have a taxable car allowance. If there is a gap between the value of a taxable car allowance and a sales rep's vehicle costs, that sales rep will stop driving. Having to pay out of pocket will disincentivize them from conducting sales trips.

Running a Cents per Mile ("CPM") program—which pays the Internal Revenue Service optional rate—is still a good idea for low-mileage drivers who take occasional business trips. However, for high-mileage drivers, CPM programs are not ideal. In the first place, if gas prices push vehicle costs beyond what is reimbursed by the IRS standard rate, drivers will again be disincentivized. But secondly, when gas prices return to normal, if your drivers are all being reimbursed at the IRS standard rate, you will run the risk of overpaying. Reimbursing high-mileage drivers at the IRS standard rate can cost companies thousands of unnecessary dollars per year, per driver.

FAVR programs protect companies and drivers by covering the actual costs of driving and adapting as those costs shift.

Does your company have a vehicle program other than FAVR? It might be time to consider a switch that is better for drivers and your bottom line.

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