[Federal Register Volume 67, Number 124 (Thursday, June 27, 2002)]
[Rules and Regulations]
[Pages 43516-43520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15942]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 2001-08; FAR Case 1997-032; Item III]
RIN 9000-AH96


Federal Acquisition Regulation; Relocation Costs

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) ``relocation costs'' 
cost principle by making allowable payments for spouse employment 
assistance and for increased employee income and Federal Insurance 
Contributions Act (FICA) (26 U.S.C. chapter 21) taxes incident to 
allowable reimbursed relocation costs, increasing the ceiling for 
allowance of miscellaneous costs of relocation, and making a number of 
editorial changes.

DATES: Effective Date: July 29, 2002.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC, 20405, (202) 501-4755, for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Jeremy Olson at (202) 501-3221. Please cite FAC 
2001-08, FAR case 1997-032.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 64 FR 28330, May 25, 1999, that revised the cost principle 
at FAR 31.205-35, Relocation costs, to--
     Remove the numerous ceilings imposed on individual 
relocation cost elements;
     Recognize the growing commercial practice of reimbursing 
relocation costs on a lump-sum basis in certain situations;
     Make allowable payments for employment assistance for 
spouses and for increased employee income and FICA taxes incident to 
allowable reimbursed relocation costs;
     Increase the ceiling for allowable miscellaneous 
relocation costs; and
     Make a number of editorial changes. The final rule amends 
the FAR to--
     Increase the limit for miscellaneous expenses when a lump-
sum approach is used. The current FAR requires the reimbursement of 
miscellaneous expenses to be limited to actual expenses or $1,000 (if 
the lump-sum approach is used). The proposed rule removed the $1,000 
limitation in its entirety. To reduce the Government's risk in this 
area, the final rule maintains a ceiling for miscellaneous expenses 
when a contractor uses the lump-sum payment method, but increases the 
limit from $1,000 to $5,000. The cost principle continues to have no 
ceiling for miscellaneous expenses when reimbursement is based on 
actual expenses;
     Add two new categories of allowable relocation costs. 
Consistent with the proposed rule, the final rule makes allowable two 
categories of expenses that are currently unallowable: (1) Payments for 
increased employee income and FICA taxes incident to allowable 
reimbursed relocations costs, and (2) payments for spouse employee 
assistance. Since contractors incur these types of costs in a good 
faith effort to keep transferred employees from being adversely 
affected by the relocation, it appears equitable to reimburse 
contractors for these types of costs. In addition, the Employee 
Relocation Council (ERC) data showed that it is a common industry 
practice to reimburse relocating employees for both of these costs; and
     Make a number of editorial changes, including revising the 
``compensation for personal services'' cost principle at FAR 31.205-
6(e)(2) to clarify that the differential allowances paid to compensate 
for increased taxes on employee compensation is unallowable, but that 
the payments to compensate for increased taxes incident to allowable 
reimbursed relocation costs is allowable.
    Twenty-two respondents submitted public comments. The Councils 
considered all comments when developing the final rule. A discussion of 
the major comments follows:
     Inadequate Analysis. One commenter expressed the opinion 
that ``the proposed changes to FAR 31.205-35 have not been adequately 
researched and the potential impact has not been documented.'' The 
commenter went on to suggest that all of the proposed changes, except 
for the lump-sum payment option, have been carefully considered by the 
FAR drafters in the past and that those previous decisions should not 
be overturned lightly and without thorough research and documentation 
that demonstrate how the conditions have changed to make previously 
rejected proposed changes now acceptable. In a related comment, another 
commenter cautioned that ``the councils should carefully review the 
information provided in response to the questions directed to industry 
respondents to determine that the administrative time and cost savings 
will offset increased costs before eliminating the ceilings.''
    Response to Comments: As an integral part of its review of the 
public comments submitted in response to this proposed rule, current 
industry relocation practices were carefully analyzed (primarily using 
data compiled by the ERC in its 1998 report entitled ``Relocation 
Assistance:
    Transferred Employees''), together with the past regulatory history 
of the relocation cost principle.
     Disagree With Removing Ceilings. Four commenters opposed 
the removal of the current ceilings on individual relocation cost 
elements, while two of them added that ``if the current limitations are 
not adequate, they should be adjusted but not eliminated.'' These two 
commenters disagreed with the Federal Register justification that the 
``ceilings represent unnecessary micromanagement of contractor business 
practices.'' One stated that ``cost ceilings are a means of controlling 
business expenses reimbursed with taxpayer dollars,'' and the other 
argued that ``the ceilings merely represent the maximum the Government 
believes is reasonable.'' The commenter continued: ``The FAR ceilings 
were initially implemented to assure that reasonableness determinations 
were consistently applied to all contractors and that unreasonable 
costs would not be paid because the cost principle is too general or 
unenforceable.''
    One commenter stated that ``the ceilings * * * are necessary to 
protect the Government from liability for reimbursement of excessive 
costs.'' Another maintained that since the 14 percent limitation on 
closing costs and

[[Page 43517]]

the continuing costs of ownership of a former residence (FAR 31.205-
35(a)(3) and (4)) and the 5 percent limitation on costs for purchasing 
a new home (FAR 31.205-35(a)(6)(ii)) were based on commercial industry 
standards, there is no justification for their removal. Another stated 
that these 14 percent and 5 percent caps appeared reasonable, but added 
that waivers ``may be acceptable on a case-by-case basis.''
    Response to Comments: Three alternatives were evaluated during 
consideration of this issue: removal of the ceilings, adjustment of the 
ceilings, and retention of the current ceilings. The alternatives are 
discussed below:
    Alternative 1--Remove Ceilings as Reflected in the Proposed Rule. 
The ERC data indicated that some of the current FAR ceilings on 
individual relocation cost elements were too low. One alternative to 
eliminating this relationship is for the ceilings to be eliminated as 
shown in the proposed rule, rather than adjusted. This alternative 
would be a fundamental shift in how the Government evaluates the 
allowability of contractor relocation costs. An argument can be made 
that this change is consistent with promoting greater acceptance of 
commercial practices. Under this approach, the Government would place 
greater reliance upon contractors' individual corporate relocation 
policies to limit such costs to reasonable amounts, rather than 
continuing to micromanage contractor business practices. This would 
involve a systems approach requiring greater use of professional 
judgment by our auditors and contracting officers to ensure that 
relocation costs in total are reasonable, which is more difficult than 
utilizing a series of caps to determine cost allowability. This 
alternative would tend to satisfy those who believe that the various 
ceilings on individual relocation cost elements have made the current 
cost principle unnecessarily detailed.
    Alternative 2--Retain Ceilings With Appropriate Adjustments. This 
alternative is more consistent with the argument that the rationale 
behind the numerous past decisions to retain the ceilings was sound. 
That is, (1) industry practice varies widely, (2) reasonableness 
determinations should be consistently applied to all contractors, and 
(3) the cost principle without ceilings is too general and 
unenforceable. Further, the Federal procurement process argues for the 
retention of the ceilings. Without these stated ceilings, contracting 
officers would be put in the unenviable position of determining what 
constitutes reasonable relocation costs without ready access to the 
necessary information to make this determination. By performing the 
necessary market research and setting reasonable ceilings in this cost 
principle, the Government avoids the inefficient process of having 
hundreds of different procurement personnel performing various levels 
of research and making inconsistent determinations. The ceilings should 
be set at a level that allows contractors to be reimbursed for 
reasonable relocation costs that are not unallowable.
    Alternative 3--Retain Current Ceilings but Reevaluate.
    The basis for this alternative is that the rationale supporting a 
shift either to eliminate or to adjust the ceilings is incomplete, and 
a reasoned policy change cannot be made at this time. There is 
sufficient information to justify evaluation of whether a policy change 
should be considered, but there is not sufficient information to 
determine what a better policy might be. This is the approach adopted 
by the FAR Council.
     Lump-Sum Approach.
    Lump-Sum Approach Would Result in Savings. Nine commenters argued 
that an expanded lump-sum approach would result in significant savings 
for contractors and the Government. One stated that at a Government 
business segment using a lump-sum approach, instead of an actual and 
reasonable method, savings achieved for the temporary living portion of 
relocation costs averaged $4,432 per relocated employee for a total 
savings on Government contracts of almost $200,000 per year. Similarly, 
another indicated that it is experiencing savings of $6.4 million per 
year by offering a lump-sum option for reimbursement of temporary 
living expenses to relocated employees in its commercial segments. This 
commenter projected that it has ``the potential to save an additional 
$1 million per year by offering the same option within its businesses 
that sell goods and services to the U. S. Government.'' Another 
commenter indicated an estimated saving of between $400,000 and 
$500,000 per year due to the lump-sum relocation option.
    Disagree With Lump-Sum Approach. One commenter objected ``to the 
lump-sum payment as proposed because it would increase administrative 
cost with no evident benefit for the Government.'' The commenter added 
that ``few contractors use a lump-sum approach for total relocation 
cost,'' and expressed concern that ``expanding the lump-sum approach 
beyond miscellaneous expenses (for which a lump-sum up to $1,000 is 
already permitted) would make it virtually impossible to assure that 
the lump-sum payment does not include unallowable costs.'' While not 
directly opposing an expanded use of the lump-sum approach, three other 
commenters expressed concerns that ``in the absence of a database that 
establishes what constitutes reasonable relocation expenses in various 
locations, contracting officers will have difficulty negotiating 
advance agreements on a broad range of relocation expenses.'' One 
commenter added: ``Without some objective data, it is unreasonable to 
impose the burden of determining reasonableness on the contracting 
officer.''
    Response to Comments: Review of the ERC data found that there is no 
current industry practice of using lump-sum reimbursements for the 
purchase or sale of a home. It appears inappropriate for the cost 
principle to recognize lump-sum payments for these types of relocation 
costs if there is no evidence of such an industry practice.
    Additionally, an industry association commenter noted that in its 
survey of member companies, ``no respondent used the lump-sum approach 
on all relocation costs.'' Accordingly, the broad lump-sum 
reimbursement approach was removed from the rule.
    The lump-sum reimbursement approach covering miscellaneous expenses 
only that is currently in the FAR was retained, but the ceiling amount 
was increased from $1,000 to $5,000. An unlimited lump-sum for 
miscellaneous expenses could easily become a sub rosa vehicle for 
reimbursing unallowable costs (such as a loss on the sale of a home) or 
for awarding a hidden bonus to the relocating employee. While some 
commenters contend that contractors and the Government will share in 
cost reductions through use of lump-sum payments, others believe the 
opposite will occur. No convincing data were found one way or the 
other. This is further bolstered by indications from ERC that companies 
use lump-sum reimbursements primarily to improve employee morale and to 
reduce administrative costs. The net cost impact is unclear. This issue 
may be pursued again in a separate FAR case to determine if there is a 
clear answer justifying adoption of a broader lump-sum approach.
     Remove Mandatory Advance Agreement Requirement for Lump-
Sum Approach. Eight commenters recommended that the requirement for an 
advance agreement with the Government prior to using the lump-sum 
payment option be eliminated.

[[Page 43518]]

Some argued that ``the requirement for an advance agreement is not 
necessary'' because ``lump-sum payments are an accepted commercial 
practice'' and ``are more cost effective than actual cost tracking.'' 
One added that ``at times, whether or not an advance agreement is 
executed depends on subjective rather than objective factors.'' It 
added that ``inconsistent actions concerning the execution of an 
advance agreement on lump-sum payments could put companies on an 
unequal footing when bidding on Government contracts.'' Another 
observed that ``formal acceptance by the contracting officer of what is 
likely to be a case-by-case implementation of lump-sums is not 
consistent with streamlining or acceptance of commercial practices.'' 
Another stated that the mandatory advance agreement requirement ``is 
contrary to the spirit of Acquisition Reform'' and ``creates another 
administrative burden.''
    Response to Comments: The original rationale for including a 
mandatory advance agreement requirement in the proposed rule was to 
give the Government additional control over the broadly worded lump-sum 
guidance. However, we have revised paragraph (b)(2) of FAR 31.205-35 to 
delete the mandatory advance agreement requirement, since we have 
removed the lump-sum approach from the rule.
     Disagree/Agree With Removing Mortgage Interest 
Differential and Rental Differential Payments. Two commenters saw no 
reason for removing the specific references to mortgage interest 
differential and rental differential payments currently found at 
paragraphs (a)(7) and (a)(8) of FAR 31.205-35. One stated: ``Our survey 
data, along with analysis of published relocation survey data, did not 
demonstrate any significant difference in conditions that exist now 
versus conditions that existed when these provisions were included in 
the cost principle. Therefore, we cannot determine the basis for the 
statement that coverage of these types of costs is no longer needed.'' 
Conversely, another commenter expressed its belief that ``eliminating 
paragraphs FAR 31.205-35(a)(7) and (8) will provide the advantage of 
simplification without adding costs to the Government.''
    Response to Comments: Although interest rates are currently very 
low and the impact of interest differential is now very limited, 
interest rates could increase in the future. We have added both of 
these types of payments back into the paragraph (a) list of allowable 
relocation costs.
     Delete FAR 31.205-35 (a)(1) thru (a)(9). Three commenters, 
noting that the proposed rule would remove the specific references to 
mortgage interest differential and rental differential payments, 
expressed concern ``that Government auditors may assert that these 
costs are now unallowable, notwithstanding the statements pertaining to 
them included in the background section of this proposed rule.'' To 
avoid such disputes over these and other relocation costs not 
specifically mentioned under paragraph (a), they suggested that the 
whole list of allowable relocation costs at FAR 31.205-35(a) (1) thru 
(a)(9) be deleted.
    Response to Comments: The Councils agree that removing the specific 
references to mortgage interest differential and rental differential 
payments from the cost principle could create confusion about the 
future allowability of such costs, and they have added both of these 
types of payments back into the paragraph (a) list of allowable 
relocation costs. The Councils are also convinced there is great 
benefit in making it absolutely clear that the listed types of 
relocation costs in paragraph (a) are allowable and do not think this 
list should be deleted.
     Agree/Disagree With Making Spouse Employment Assistance 
Payments and Tax Gross-Ups Allowable. Eight commenters agreed with the 
equitable treatment rationale in the Federal Register for making two 
new categories of relocation costs allowable: (1) Payments for spouse 
employment assistance, and (2) payments for increased employee income 
and FICA taxes incident to allowable reimbursed relocation costs 
(commonly referred to as ``tax gross-ups''). Several commenters 
``applauded'' this change which, as one commenter put it, 
``acknowledges that contractors find it necessary to make such payments 
to avoid unfairly penalizing the relocating employee.''
    On the other hand, another commenter found it ``illogical'' to use 
the ``good faith effort'' rationale to allow these costs, but not the 
other unallowable relocation costs. However, after noting that ``there 
is some evidence that spousal employment assistance is becoming a 
general industry practice,'' that commenter stated that it does ``not 
object to the reconsideration of the allowability of spouse employment 
assistance (subject to reasonable limitations) after adequate research 
and analysis is performed.''
    Regarding tax gross-ups, that commenter quoted from a 1985 Cost 
Principles Committee report: ``We believe that there was no 
Congressional intention to grant tax relief to contractor employees, 
but that it was the intent to grant such relief to Federal employees in 
order to reduce the out-of-pocket costs heretofore being borne by 
Federal employees.'' That commenter also pointed out that past Cost 
Principles Committee reports have concluded tax gross-ups are actually 
a compensation cost, and not a relocation cost. Finally, the commenter 
disagreed ``with the theory that contractors should be reimbursed for 
these types of costs merely because Federal employees are.'' In support 
of this position, the commenter cited OFPP's 1986 ``Study of Relocation 
Costs,'' which found that ``the policies governing the payment for 
contractor relocation should remain separate from the policies 
governing the relocation benefits paid to Federal employees.''
    Response to Comments: The ERC data showed that it is a common 
industry practice to reimburse relocating employees for both of these 
costs. The Councils believe they are bona fide relocation costs and 
that it is fair to make them allowable now on Government contracts, 
just as it was fair to begin reimbursing Federal employees for them.
     Apparent Conflict Between Tax Gross-Ups and Taxes Cost 
Principle. One commenter noted an apparent conflict between the new 
language allowing tax gross-ups for reimbursed relocation costs and the 
taxes cost principle provision that makes Federal income taxes 
unallowable (FAR 31.205-41(b)(1)).
    Response to Comments: The Councils do not see a conflict. The taxes 
cost principle makes contractor Federal income tax payments 
unallowable, not contractor reimbursements to an employee for the 
relocating employee's increased tax liability.
     Federal Employees Do Not Get Tax Gross-Ups on FICA. One 
commenter noted that ``Government employees are reimbursed income taxes 
on relocation reimbursements, but not FICA. Employees, particularly 
employees of private contractors, theoretically receive a future 
benefit from increased FICA contributions. Therefore, reimbursement of 
FICA could be considered inappropriate, and we would recommend 
reimbursement of income taxes, but not FICA.''
    Response to Comments: The Councils disagree with this 
recommendation. They do not believe the allowability of contractor 
relocation costs must always parallel the treatment afforded relocating 
Federal employees; nor do they see uncertain future benefits as a valid 
reason for excluding FICA from

[[Page 43519]]

allowable contractor tax gross-ups. The Councils believe this is a bona 
fide relocation cost, which should be made allowable.
     Administrative Costs Will Decrease/Increase. Thirteen 
commenters agreed with the Federal Register rationale that the proposed 
rule would reduce administrative costs. As one commenter put it: ``We 
believe that the proposed changes would result in savings to both 
contractors and the Government by reducing or eliminating a number of 
burdensome administrative processes. For instance, with the elimination 
of thresholds, contractors would no longer need to track applicable 
costs separately and compare them to artificial thresholds. Detailed 
training on how to apply the thresholds would no longer be required. We 
believe that, to the extent that contractors find it otherwise 
appropriate and feasible to adopt lump-sum practices, record-keeping 
requirements would be reduced for both the contractor and the 
relocating employee. Finally, internal and external oversight 
requirements would be streamlined.''
    In contrast, two commenters maintained that administrative costs 
would increase under the proposed rule. One argued that ``audit effort 
will necessarily increase (as will the contractor support of the 
increased audit effort) since instead of having stated reasonableness 
limitations, the auditor will now be forced to evaluate individual 
contractor systems for assuring reasonableness.'' The commenter added 
that ``using a broad criterion such as reasonableness naturally leads 
to differences of opinion,'' which ``will result in increased disputes 
which will increase the effort required by contractors, contracting 
officers, and the courts to settle these disputes.'' Finally, the 
commenter stated: ``Our survey of Government contractors found that the 
administrative cost incurred by contractors to comply with the 
requirements of FAR 31.205-35 is immaterial. Any potential savings 
would certainly be offset by the administrative cost involved in 
obtaining an advance agreement for the use of lump-sum payments.'' The 
other commenter expressed concern that ``without the ceilings, we 
anticipate contracting officers will need to perform a greater amount 
of analysis to determine the reasonableness of a contractor's proposed 
relocation costs.''
    Response to Comments: The Councils expect that adoption of the rule 
will result in reduced administrative burden for contractors and 
increased administrative burden for the Government; but, they have no 
way to quantify these anticipated impacts. They do not consider an 
increase in the Government's administrative effort, by itself, to be a 
valid reason for retaining the existing FAR language.
     Relocation Costs Will Increase. Three commenters argued 
against the proposed rule because they believed it will result in 
higher relocation costs being claimed under Government contracts. Based 
on its own analysis of more than 50 Government contractors, one 
commenter projected that ``the proposed rule may result in more than 
$130 million in additional relocation costs claimed by Government 
contractors annually.'' However, another commenter countered that 
``concerns about added costs or potential savings that may result from 
a policy change should be irrelevant to the objective at hand; i.e., 
ensuring that the Government pays fair and reasonable expenses under 
noncompetitive and cost reimbursable contracts.''
    Response to Comments: While relocation costs claimed on Government 
contracts may increase if the proposed rule is adopted, that is not a 
valid argument for retaining the existing FAR language. The Councils 
believe the cost principles should ensure that contractors are treated 
fairly, consistent with sound public policy. The cost principles should 
not be used as a cost containment mechanism.
    This is not a significant regulatory action, and therefore, was not 
subject to review under Section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded 
to small entities use simplified acquisition procedures or are awarded 
on a competitive, fixed-price basis and do not require application of 
the cost principles contained in this rule.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose information collection requirements that require 
the approval of the Office of Management and Budget under 44 U.S.C. 
3501, et seq.

List of Subjects in 48 CFR Part 31

    Government procurement.

    Dated: June 19, 2002.
Al Matera,
Director, Acquisition Policy Division.

    Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth 
below:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

    1. The authority citation for 48 CFR part 31 continues to read as 
follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).


    2. Revise paragraph (e)(2) of section 31.205-6 to read as follows:


31.205-6  Compensation for personal services.

* * * * *
    (e)(1) * * *
    (2) Differential allowances for additional Federal, State, or local 
income taxes resulting from domestic assignments are unallowable. 
(However, payments for increased employee income or Federal Insurance 
Contributions Act taxes incident to allowable reimbursed relocation 
costs are allowable under 31.205-35(a)(10).)
* * * * *

    3. Revise paragraphs (a), (b), (c), and (f)(1) of section 31.205-35 
to read as follows:


31.205-35  Relocation costs.

    (a) Relocation costs are costs incident to the permanent change of 
assigned work location (for a period of 12 months or more) of an 
existing employee or upon recruitment of a new employee. The following 
types of relocation costs are allowable as noted, subject to the 
limitations in paragraphs (b) and (f) of this subsection:
    (1) Costs of travel of the employee and members of the employee's 
immediate family (see 31.205-46) and transportation of the household 
and personal effects to the new location.
    (2) Costs of finding a new home, such as advance trips by the 
employee or the spouse, or both, to locate living quarters, and 
temporary lodging during the transition period for the employee and 
members of the employee's immediate family.
    (3) Closing costs incident to the disposition of the actual 
residence owned by the employee when notified of the transfer (e.g., 
brokerage fees, legal fees, appraisal fees, points, and finance 
charges), except that these costs, when

[[Page 43520]]

added to the costs described in paragraph (a)(4) of this subsection, 
shall not exceed 14 percent of the sales price of the property sold.
    (4) Continuing costs of ownership of the vacant former actual 
residence being sold, such as maintenance of building and grounds 
(exclusive of fixing up expenses), utilities, taxes, property 
insurance, and mortgage interest, after the settlement date or lease 
date of a new permanent residence, except that these costs, when added 
to the costs described in paragraph (a)(3) of this subsection, shall 
not exceed 14 percent of the sales price of the property sold.
    (5) Other necessary and reasonable expenses normally incident to 
relocation, such as disconnecting and connecting household appliances; 
automobile registration; driver's license and use taxes; cutting and 
fitting rugs, draperies, and curtains; forfeited utility fees and 
deposits; and purchase of insurance against damage to or loss of 
personal property while in transit.
    (6) Costs incident to acquiring a home in the new work location, 
except that--
    (i) These costs are not allowable for existing employees or newly 
recruited employees who were not homeowners before the relocation; and
    (ii) The total costs shall not exceed 5 percent of the purchase 
price of the new home.
    (7) Mortgage interest differential payments, except that these 
costs are not allowable for existing or newly recruited employees who, 
before the relocation, were not homeowners and the total payments are 
limited to an amount determined as follows:
    (i) The difference between the mortgage interest rates of the old 
and new residences times the current balance of the old mortgage times 
3 years.
    (ii) When mortgage differential payments are made on a lump-sum 
basis and the employee leaves or is transferred again in less than 3 
years, the amount initially recognized shall be proportionately 
adjusted to reflect payments only for the actual time of the 
relocation.
    (8) Rental differential payments covering situations where 
relocated employees retain ownership of a vacated home in the old 
location and rent at the new location. The rented quarters at the new 
location must be comparable to those vacated, and the allowable 
differential payments may not exceed the actual rental costs for the 
new home, less the fair market rent for the vacated home times 3 years.
    (9) Costs of canceling an unexpired lease.
    (10) Payments for increased employee income or Federal Insurance 
Contributions Act (26 U.S.C. chapter 21) taxes incident to allowable 
reimbursed relocation costs.
    (11) Payments for spouse employment assistance.
    (b) The costs described in paragraph (a) of this subsection must 
also meet the following criteria to be considered allowable:
    (1) The move must be for the benefit of the employer.
    (2) Reimbursement must be in accordance with an established policy 
or practice that is consistently followed by the employer and is 
designed to motivate employees to relocate promptly and economically.
    (3) The costs must not be otherwise unallowable under subpart 31.2.
    (4) Amounts to be reimbursed shall not exceed the employee's actual 
expenses, except that for miscellaneous costs of the type discussed in 
paragraph (a)(5) of this subsection, a flat amount, not to exceed 
$5,000, may be allowed in lieu of actual costs.
    (c) The following types of costs are unallowable:
    (1) Loss on the sale of a home.
    (2) Costs incident to acquiring a home in the new location as 
follows:
    (i) Real estate brokers' fees and commissions.
    (ii) Costs of litigation.
    (iii) Real and personal property insurance against damage or loss 
of property.
    (iv) Mortgage life insurance.
    (v) Owner's title policy insurance when such insurance was not 
previously carried by the employee on the old residence. (However, the 
cost of a mortgage title policy is allowable.)
    (vi) Property taxes and operating or maintenance costs.
    (3) Continuing mortgage principal payments on a residence being 
sold.
    (4) Costs incident to furnishing equity or nonequity loans to 
employees or making arrangements with lenders for employees to obtain 
lower-than-market rate mortgage loans.
* * * * *
    (f) * * *
    (1) The term of employment is 12 months or more;
* * * * *
[FR Doc. 02-15942 Filed 6-26-02; 8:45 am]
BILLING CODE 6820-EP-P