Companies with a mobile workforce often struggle with overpaying on mileage. It can be difficult to know how to control your program spend. Plus, you want to ensure employees are fairly reimbursed.
If cost savings are on your mind, then a Fixed & Variable Rate (FAVR) program may be the perfect solution for your company to reimburse employees who drive their own vehicle for work. While some companies use a Cents Per Mile (CPM) reimbursement program or pay a flat allowance, FAVR offers a more precise, tax-free alternative.
This guide will help you decide which reimbursement plan is right for your organization by answering top questions about the program:
- What exactly is a Fixed & Variable Rate program?
- How are employee reimbursements calculated under a Fixed & Variable Rate program?
- What is the difference between a Fixed & Variable Rate program and other vehicle programs?
- Why would you choose a Fixed & Variable Rate program over a Cents Per Mile (CPM) program?
- Is a Fixed & Variable Rate program right for your business?
- How can I implement a Fixed & Variable Rate program at my company?
What is a Fixed & Variable Rate program?
A FAVR plan reimburses employees who use their own car for business purposes. FAVR payments are a combination of a monthly allowance and mileage reimbursement.
The allowance covers the fixed costs of owning a vehicle. The mileage reimbursement covers the variable costs of operating a vehicle.
Because a FAVR program is designed to closely match an employee’s actual costs, it is considered the fairest reimbursement program. It most accurately pays employees with different driving amounts, not under- or over-reimbursing different people. As a result, it also often leads to lower spend compared to a Cents Per Mile program.
Curious to see how much you could save with a FAVR program? Let's chat!
How are employee reimbursements calculated under a FAVR program?
Each employee’s reimbursement is tailored to their location and vehicle type. This customization is another reason FAVR is considered very fair.
The fixed payment is calculated by adding together the fixed vehicle ownership costs. These costs include:
- Depreciation for the “standard auto” for the employee group
- Personal property taxes for the “standard auto” for the employee group
- Insurance rates in the employee’s zip code and their group’s “standard auto”
- License and registration fees in their state
The total fixed costs for the year are divided by twelve to determine the monthly payment.
While costs are based on a representative “standard auto,” employees have the flexibility to choose any vehicle they want, as long as it meets certain value and age requirements relative to the standard auto. The standard auto can be different for different employee groups, such as managers and junior reps. This customization also gives companies flexibility to meet their budget and benefits goals, while ensuring employees are showing up at customers with a vehicle that aligns to the image they want to project.
The variable rate is calculated by adding the variable vehicle operating costs, which vary based on location and vehicle type. These variable costs include:
- Fuel prices in the employee’s area
- Tire prices for the employee group’s “standard auto”
- Cost of oil changes and other routine maintenance for the employee group’s “standard auto”
Variable rates are also updated periodically to reflect changing fuel prices. An employee’s variable payment is then calculated by multiplying their variable rate for the period by the number of miles they drove during that time.
What is the difference between FAVR and other vehicle programs?
Both FAVR and Cents Per Mile (CPM) are IRS-compliant programs for tax-free reimbursements. Unlike a flat allowance, these mileage-based reimbursements do not lead to "tax waste"—a costly problem that reduces the take-home benefit of stipends for employees and adds to your expenses. For an in-depth discussion of the cost of allowances to your business, please see our guide on The True Cost Difference: Vehicle Stipend vs. Mileage Reimbursement.
Comparing CPM and FAVR programs
The main differences between these programs are in how reimbursements are calculated and paid. CPM treats all employees the same, regardless of where they live and the type of car they drive.
Whether someone lives in New York or California, they’re reimbursed the same cents per mile rate for every mile that they drive. The same goes for whether they drive a 20-year old Honda Civic or a brand new Tesla Model S. CPM reimbursement is fairer than a flat allowance because it takes into account how many miles an employee drives, but does not go as far as FAVR.
FAVR tailors reimbursements more closely to an employee’s actual costs for owning and operating a vehicle. These costs typically vary based on their location and vehicle. For instance, average auto insurance premiums are higher in New York or California than the Midwest, as are prices at the pump.
CPM reimbursements are just a variable payment. As a result, monthly reimbursements often fluctuate depending on how many miles are driven. If an employee does little driving (like during the start of COVID), they will get a small reimbursement. Nevertheless, these employees still incur ownership costs for their car..
In contrast, FAVR payments more accurately reflect employee costs. The fixed payment does not change regardless of how many miles an employee drives. The variable payment, which depends on mileage, is just a portion of the total reimbursement.
This combo means less budget fluctuation and under- or over-reimbursement.
Another difference between FAVR and CPM is their level of complexity and potential administrative burden.
CPM reimbursements, whether using the IRS Standard Mileage Rate or a company rate, are straightforward. It’s easy to get started and manage. Calculating an employee’s reimbursement is nothing more than a simple multiplication.
FAVR is more sophisticated. This means it takes more time to implement and maintain. Companies who work with Everlance typically implement a FAVR program in 6-10 weeks. The time depends on the type of program they’re transitioning from and their target timeline.
We’ve helped customers transition from a company fleet, another FAVR provider, and CPM reimbursements or flat allowance to a FAVR program that achieves your company’s budget objectives. We design it around your priorities, helping you set the fixed rate and keep variable rates updated based on our proprietary data.
Why would you choose a Fixed & Variable Rate plan over a Cents Per Mile (CPM) program?
FAVR offers a few key advantages compared to other reimbursement models.
FAVR has lots of cost-saving potential, as you avoid over-reimbursing high mileage drivers.
Data on overall car costs shows that the cost per mile goes down the more someone drives. For someone driving 15K miles per year, the average cost is $0.64 per mile, but at 20K miles per year, the average cost drops $0.55 per mile. A FAVR program accounts for this fact and prevents over-reimbursing high mileage employees.
FAVR also avoids over-reimbursing employees in lower cost areas. Think about it: if you have employees driving in Dublin, Ohio, and New York City, NY, with CPM they’ll still get reimbursed the same rate—even though the cost of insurance and gas is different in each location.
Fairest reimbursement model
Companies choose a FAVR plan because it is the fairest, most realistic vehicle reimbursement model.
Reimbursements are tailored to each individual. Employees understand how their reimbursement is aligned to their actual costs. They don’t feel like they’re getting paid less than they should be and are less likely to turnover.
FAVR reduces your company’s liability risk and costs. As part of a FAVR program, employees are required to show proof of insurance that meets certain minimum requirements. If an accident does occur, their insurance kicks in first.
Finally, a FAVR program gives you greater flexibility and budget control over time. Costs are more predictable. Plus, a FAVR program can be tailored to meet your budget objectives—while still reimbursing employees a fair amount and staying compliant.
Is FAVR right for your business?
Before you make the switch, it's important to ensure your company meets the requirements.
Specifically, your company must have at least five mobile workers driving more than 5,000 miles for business on a yearly basis to qualify. If you don’t meet these minimums, a CPM reimbursement is your best option.
We see companies benefit most from a FAVR program if they have:
- Mobile employees spread out in different states
- Employee groups with different vehicle needs or expectations, or
- Employees with high mileage
Companies that are concerned about risk exposure, or who have experience with a lot of employee car accidents, often consider FAVR a good fit. That’s also true if fairly reimbursing employees and keeping them happy is top of mind.
The type of business is less important in determining fit. Some examples of businesses who may benefit from using FAVR include sales executives or consultants who need to drive regularly to meet with clients, home healthcare workers who make patient visits, or restaurants and food service companies that offer delivery services. We’ve worked with a lot of beverage distributors to implement FAVR, amongst many other types of businesses.
Curious to see if FAVR is right for you?
How can I implement a Fixed & Variable Rate program at my company?
The IRS provides guidelines for a FAVR program here. However, because developing and maintaining the program requires time and expertise, most companies turn to a solution provider to help them.
These solutions include consultants, who just design the program for you, as well as all-in-one solutions, that both develop the program and provide everything you need to manage reimbursements.
Meet Everlance Business
We think you’ll find Everlance Business a no-brainer. Between our #1 rated mileage tracking app, intuitive admin dashboard, and service from a named Customer Success Manager as well as a driver support team, your whole team is sure to love it.
Getting started just takes a conversation with a member of our team to gather details about your business. From there, we’ll perform an analysis to help you determine if FAVR is a good fit for your business. If so, we’ll get started on designing a custom program around your needs!