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Offset the Medical Device Tax By Reining in Transportation Costs for Mobile Employees

A fixed- and variable-rate reimbursement plan for employee vehicle costs could help companies eliminate the Federal Insurance Contributions Act tax entirely.

It’s no secret that the medical device industry faces new and higher taxes in 2013 that are significantly impacting business operations from the largest corporations to the smallest start-ups. Around $97 million dollars has been redirected to the IRS in January 2013 alone—money that could have otherwise been invested in business advancement.

“Instead of investing in new medical technologies or creating new jobs, innovators across the United States wrote a check to the IRS this month,” said Mark Leahey, president and CEO of the Medical Device Manufacturers Association (MDMA). Uncertainties may force business owners, especially small business owners, to reduce the amount they would otherwise use to expand their workforce or invest in R&D.

Many business owners are uncertain how they will overcome these increases and obtain relief—short of a repeal of the excise tax, preemptive layoffs, or sacrificing R&D. Given the industry’s new tax implications and return-on-investment pressures, companies dealing with this tax are turning to alternative solutions to help redirect cash flow.

One solution is to look for cash savings and tax savings in unexpected places that may have been overlooked before. Many companies are doing this by finding new ways to operate with lean staffing levels, controling expenses, reducing risk, and conserving capital.

One area that impacts all of these areas is employee mobility, especially with a company’s field workforce. Mobile workers, who don’t spend their time in one location but are required to travel frequently to conduct their business, are often concentrated in sales and service operations, and having a mobile workforce can remove geography as a barrier to growth and success. The payoff from increasing employee mobility is improved organizational agility, stronger client relationships, and, ultimately, revenue growth. Organizations can improve profitability by 1–4% simply by making employee mobility a strategic priority and by managing programs in a more integrated way, according to a 2008 whitepaper by Runzheimer International.

Although a recent Runzheimer International report correlated increasing mobility to higher growth, mobile employees are generally the growth drivers—those on the front lines of revenue generation and customer retention—and field costs impact corporate agility, talent management, and capital allocation. With a potential bottom line impact as high as 30% for many organizations, the opportunity for growth and savings of expanding employee mobility in a streamlined way may be a way for companies affected by the excise tax to maintain staffing levels, R&D investments, and competitive advantage.

Going Mobile with Business Vehicles

Most companies provide a vehicle program to employees who need a car to perform their job function—whether it’s providing company cars, flat allowances, or reimbursements for using their personal vehicles for business purposes.
Most organizations use one or more of the following approaches:

  • Company-provided fleet vehicle (company car).
  • Taxable flat monthly allowance.
  • IRS rate-per-mile reimbursement.
  • Fixed- and variable-rate reimbursement (FAVR) plan.

Each of these approaches creates a different financial outcome within an organization.

With a company car program, the employer purchases or leases vehicles and provides them to selected employees. The employer often pays all related costs (e.g., fuel, licenses, maintenance and repairs). With fleet vehicles, it’s difficult to scale and accommodate quick changes in staffing, and fleets often drain credit lines that could be used for other business investments. Employers often pay for personal use of the vehicle and also maintain a constant risk exposure to vehicle accidents, whether an employee is working or not when driving the vehicle.

With a taxable flat-rate allowance, each employee receives a set monthly payment to offset the employee’s business-related driving costs and does not report business miles. Although this allows for predictable costs over the year and frees up capital, a flat-rate allowance is taxable to the employee and increases the taxes paid by the employer. In a typical example, a $700-per-month taxable flat-rate allowance increases Federal Insurance Contributions Act (FICA) tax liability approximately $640 per employee per year for the employer. Flat allowances are difficult to adjust when fuel prices fluctuate. This plan tends to favor low-mileage drivers (generally those who drive fewer than 11,000 miles annually), giving high-mileage drivers (generally those who drive more than 15,000 miles annually) a sense of inequity and an incentive to reduce business driving.

Many companies choose to reimburse drivers for business miles reported using the IRS safe harbor rate. Currently, the rate is $0.565 per mile. While the FICA tax payments are removed and risk exposure is minimized, this option can still be more costly for employers. Aside from the inequity due to geographic variables for drivers, those with higher business driving mileage tend to be overpaid, while those with low miles tend to be underpaid.

Choosing a FAVR plan for reimbursing business drivers offers advantages and significant cost-saving opportunities. In the FAVR plan, employees drive their own vehicles and can receive nontaxable reimbursements for their fixed and variable vehicle costs, based on cost information developed by the organization or provided by a third party. FAVR plans give maximum cost control; by separating fixed and variable costs, FAVR provides a true reflection of actual expenses related to business driving. While savings depend on multiple factors, organizations that have switched to the FAVR approach tend to report savings up to $2,000 per employee per year, or 18% over typical cents-per-mile programs. Switching from a fleet program frees up capital and requires less time to administer the plan. With FAVR plans, there is no FICA tax liability or income tax reporting, no drain on capital, and over-payments are eliminated. While the employer retains broad control over the types of vehicles driven by participating employees, the employees own the vehicles, reducing the company’s risk exposure outside normal business hours.

Mobile Sales Productivity

If controlling the costs of mobility is one side of the coin, increasing productivity in the field is the other. By doing both, medical device companies can improve their net profit and lessen the impact of the excise tax on the total bottom line.

The first step in transforming the productivity of a salesperson is to establish what success looks like, and ensure your sales team has the right tools and technology to reach their goals. What makes a sales person successful? Is it the number of clients visited in a day, the amount of revenue generated, or a high ROI? How will effectiveness be measured, and with what frequency? Which activities yield the highest value? Is it in nurturing clients, generating new contacts, or closing deals?

Determining the highest value activities is the first priority. Outlining performance expectations in line with high value activities and performance metrics is the foundation for high productivity. Quantifiable metrics, such as the number of prospects or clients visited in a given period of time or the frequency of visits, are needed to truly measure the success of a mobile employee. Unfortunately, these leading management indicators of success are difficult to capture and measure consistently. Specific, quantifiable metrics are crucial to gaining visibility into the productivity of a sales team. Some of these metrics include the following:

  • Time spent driving from client to client.
  • Duration at each meeting.
  • Number of meetings in person.
  • Number of proposals.
  • Number of closed deals.

Specially designed mobile apps are one solution to help bring improved efficiency and accuracy in mobile activity reporting. Apps that track and document activities from the field automatically can be used by companies to gain greater visibility into the activities of a sales team at a glance and determine if sales employees are spending the right amount of time on the road or with clients. This technology can help companies make smarter decisions about territories, policies, and personnel based on actual behavior, and it allows benchmarking of activities of the most successful mobile employees for modeling and coaching others to the same levels of success.

Bottom Line: Increase Revenue and Decrease Costs

Organizations growing more than 10% per year are spending on average more than $12,000 per employee per year to keep them mobile and productive in the field, according to a recent Runzheimer International report. By increasing customer visits to the right targets, net profits are higher and revenue that was used in mobility costs can be used to fund tax requirements.
If you are reimbursing your drivers a cents-per-mile rate, calculate what an 18% savings might mean to your company in this area.

If you know what your reimbursements are, you can calculate the FICA tax that was paid. By switching to a FAVR vehicle reimbursement plan, your company might eliminate this tax requirement entirely. By combining this saving with a more accurate reimbursement based on fixed and variable elements for each unique driver, you can also cut costs associated with overpaying high-mileage drivers and replacing that practice with a more accurate, cost-saving approach to business vehicle reimbursements.

In uncertain economic climates, a best practice in business management is to control as many costs as possible. Employee mobility, while critical to company growth, represents an opportunity for better management and significant savings for many companies. By implementing the right tools and policies to enable the most efficient programs, companies can realize significant gains in revenue and cost efficiency at the same time. With the squeeze on many medical device companies right now, the time is be right to examine the possibilities in this area.

David Olson is director of employee mobility at Runzheimer International (Waterford, WI), which specializes in providing services to enhance the productivity of mobile employees. Runzheimer serves more than 3,200 corporate clients including 60% of Fortune 500 companies.  

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