What is a FAVR Vehicle Reimbursement Plan?
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What is a FAVR Vehicle Reimbursement Plan?

By Alexis Reed May 4, 2022

Categories: Anywhere Workforce Vehicle Reimbursement

If you’ve looked into vehicle programs and ways to reimburse employees for mileage, youve likely come across the most popular options: company-provided vehicle programs, car allowance programs, mileage reimbursement programs and FAVR vehicle reimbursement plan. Of these programs, the FAVR vehicle reimbursement plan stands apart. But how? What is a FAVR Vehicle Reimbursement plan? And why might it be the best choice for your company?

What is a FAVR Vehicle reimbursement plan?

FAVR, which stands for “Fixed and Variable Rate, is a vehicle program grounded in IRS revenue procedure. Companies can use this procedure to reimburse driving employees tax-free for both the fixed and variable costs associated with driving for business. Put simply, it is the fairest, most accurate and most cost-effective way to reimburse driving employees who use their own vehicles for work. 

Fixed and Variable Costs

As mentioned above, the FAVR vehicle reimbursement plan is divided into two costs: fixed costs and variable costs. What makes a cost fixed and what makes a cost variable? Let’s take a closer look at each.   

Fixed Costs 

Driving employees pay for insurance premiums, registration and license fees, depreciation and taxes. These are considered fixed costs because they do not fluctuate frequently. 

But the costs of driving a personal vehicle for business go well beyond the fixed costs of insurance and registration. That’s where variable costs come in.  

Variable Costs 

Variable costs included expenses related to actually driving a car. Perhaps the most noticeable day-to-day cost for driving employees is filling the gas tank. They also pay for the variable costs, like fuel, maintenance, tires and oil. Each of these costs fluctuates more regularly than the fixed costs of insurance premiums and vehicle registration. They also change based on the amount of mileage driven. Lower mileage drivers won’t need to have their oil changed or tires replaced as frequently as higher mileage drivers.  

It’s easy to see the difference between the fixed and variable costs. One is the cost of simply owning a vehicle. The other is the cost of actually driving that car. Recognizing that, the separation of FAVR reimbursements into two separate rates makes sense. And it‘s pretty simple, right? 

Geographic Variances

Well, to complicate things a bit, both fixed and variable costs can vary greatly depending on an employee’s location. Here’s an example. Yearly vehicle property taxes are not the same in every state. In Virginia, for example, property taxes average $962. Now look at the average in Montana, which is just $85. That’s an $877 difference per year. And that is only the vehicle property tax.  

If you consider other vehicle costs, the impact of geographic variances grows to be even more substantial. Insurance premiums vary widely, from as much as $2,476 in Michigan to $805 in Maine (a $1,671 difference). Registration fees also differ by state, costing just $14 in Mississippi yet $101 in Illinois.  

But one of the biggest factors, of course, is the price of fuel. Gas prices don’t only vary from state to state, but also from city to city and day to day. These differences in cost can become an administrative nightmare for companies with a widely-dispersed driving workforce to track. With FAVR, an employee’s reimbursement also considers their geographic location. As shown above, when you have employees in multiple states, their driving costs can vary quite drastically. FAVR makes reimbursements fair and accurate.  

Where Other Programs Fall Short 

It is entirely possible for a company to have the right vehicle program without implementing FAVR. However, more often than not, companies maintain their current vehicle program because they’re unaware of alternatives and the benefits they may provide. What does the FAVR vehicle reimbursement plan have over these programs? Let’s go program by program. 

Company-Provided Vehicle Program or Fleet 

Companies may choose to purchase or lease a fleet of vehicles to control their image and appeal to potential recruits. However, there’s a reason company-provided vehicle programs are the most expensive. Fleet vehicles require considerable maintenance, and turnover in the driving employee base means vehicles frequently sit idle. Fuel cards are another expensive piece of the fleet program, especially when employees are permitted to drive their business vehicle for personal reasons. However, the biggest issue with fleet vehicles is liability in the event of an accident. 

With a FAVR vehicle reimbursement plan, companies avoid the costs of supporting fuel and maintenance for a fleet of vehicles. FAVR programs are flexible to the economy. Companies can scale up or down without worrying about idle vehicle costs. FAVR programs also mitigate the risk of company liability in the event of a vehicle accident.  

Car Allowance or Vehicle Allowance 

Companies may offer a monthly stipend, referred to as a car allowance or vehicle allowance, to pay employees for the business use of their personal vehicles. It’s an easy program to set up and the cost is dependable. However, when car allowances aren’t attributed to mileage, the IRS taxes them as additional income. That means companies pay more and employees receive less. 

With the right vendor, companies can implement a FAVR vehicle reimbursement plan that makes the capturing of mileage as easy as opening an app and driving to the destination. In addition to being fair and accurate, FAVR vehicle reimbursements are tax free.

Mileage Reimbursement or Cents-Per-Mile 

Companies may offer a mileage reimbursement, often at the current IRS mileage rate, to employees driving their personal vehicles for business reasons. This program is fairly easy to administer across a wide driver base. It is also non-taxable as employees submit mileage logs of each trip to receive their reimbursements. However, mileage reimbursement programs are best for a small, regional driver pool that drives an average of 500 miles each month. Mileage reimbursement rates do not take into account the costs of vehicle ownership specific to an employee’s area. Furthermore, with manual mileage logs, employers are exposed to mileage fraud, an issue that adds up quickly. 

As shared earlier, FAVR reimburses employees for the costs specific to their location. And, with the right provider, employees can easily capture mileage through an app. That means no more wasting time manually tracking mileage and mitigated risk of mileage fraud.  

Making FAVR Programs Possible

Fortunately, new technology providers, like Motus, have made it easier than ever to provide a cost-effective FAVR program. We offer a mileage capture app which seamlessly integrates with vehicle reimbursement to make mileage reporting and expense reimbursement easier for driving employees and their managers. 

Our platform accounts for the various costs that employees incur when driving for business. It also updates employees’ reimbursement rates based on changes in costs and manages the payment process. As a result, your company can provide the most accurate reimbursements to your driving employees without taking on the administrative burden once associated with providing FAVR programs. Interested in learning more? 

Learn More Here

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