Fixed and Variable Rate (FAVR) reimbursement programs offer employers a tax-efficient way to reimburse employees for business use of their personal vehicles. However, to maintain your tax-free status, you and your team will need to stay compliant with IRS rules.
One of the core FAVR compliance requirements involves vehicle age, specifically to ensure your employees’ vehicles aren’t older than the program’s defined retention period. FAVR programs also have plan-level requirements including minimum employee counts and insurance premiums, among others.
This regulation is designed to prevent tax-free over-reimbursement on fully depreciated vehicles. Since FAVR reimburses drivers based on a standard vehicle profile rather than their actual car, someone driving an older, fully paid-off vehicle could receive reimbursements that far exceed their true driving costs.
Related: Fixed and Variable Rate (FAVR) Reimbursement Programs Explained | How To Implement a FAVR Program
FAVR Retention Cycle Explained
Retention periods are selected by the employer (payor) based on their workforce's typical vehicle replacement patterns, with the IRS requiring a minimum of 2 years. These periods typically range from 2 to 7 years, and the length chosen has significant implications for both reimbursement amounts and which employees can receive FAVR payments under the safe harbor.
How FAVR Retention Cycles Affect Reimbursements
A shorter retention period spreads depreciation costs over fewer years, resulting in higher periodic (often monthly) fixed reimbursements to employees. For example, a 3-year retention period means the vehicle's depreciation is divided across 36 months if paid monthly, creating larger periodic depreciation payments.
Longer retention cycles spread the same depreciation over more months, reducing the monthly fixed payment but allowing more employees with older vehicles to remain in compliance. A 7-year cycle means depreciation is divided across 84 months, lowering the monthly amount but accommodating drivers who keep their cars longer.
This creates a balancing act for employers. Shorter cycles provide more generous reimbursements but exclude drivers with older vehicles, while longer cycles are more inclusive but offer lower monthly payments.
The right choice depends on your workforce demographics and vehicle turnover rates. Curious about the right plan for your team? Speak to a mileage expert today!
FAVR Vehicle Age Compliance Threshold
The IRS safe harbor rules require that FAVR allowances only be provided for vehicles whose model year does not differ from the current calendar year by more than the retention period.
This is one of several key driver-level requirements under the FAVR safe harbor, which also includes vehicle cost compliance and the requirement to substantiate at least 5,000 miles annually (or 80% of projected annual business miles, if greater), among other program rules.
Compliance is measured by comparing the vehicle's model year to the current calendar year. If the difference exceeds the retention period, the employee generally can't be treated as covered by the FAVR allowance for that vehicle during that period.
What Happens When You’re Out of Compliance
When a vehicle exceeds the retention period, the employee generally can't be treated as covered by the FAVR allowance during that time. When continuing to pay a mixed fixed-and-variable allowance outside the FAVR safe harbor, any excess above the standard mileage rate times substantiated business miles should be treated as taxable wages (and many employers reconcile this quarterly).
For 2026, the standard business mileage rate is 72.5 cents per mile. When administrators perform these taxability tests, they compare the FAVR reimbursement to what the driver would have received at the standard rate based on their actual business miles driven.
Related: Cents-Per-Mile Reimbursement vs FAVR - Which Is Right for Your Business?
High-mileage drivers may have no taxable income even when their vehicles exceed the retention period, depending on whether their substantiated business miles (at the standard mileage rate) meet or exceed their reimbursement amount. Lower-mileage drivers are more likely to have a portion of their reimbursement classified as taxable.
This testing approach allows companies to continue reimbursing employees with older vehicles while staying compliant with tax regulations, though it does create additional administrative work compared to keeping all drivers within the retention period.
Vehicle Age Compliance vs. Company Age Policies
Staying in vehicle age compliance starts with accurate vehicle information submitted when employees enroll in the FAVR program. Drivers must provide their vehicle’s make, model, and model year through a vehicle declaration that establishes their compliance status.
These declarations must be updated within 30 days after the start of each calendar year (and within 30 days of a newly covered vehicle) to ensure compliance records remain current. The model year determines age compliance, so even purchasing a newer used car can bring a driver back into compliance if it falls within the retention cycle.
Tracking and Documentation Requirements for FAVR
Beyond vehicle age, maintaining FAVR compliance requires accurate mileage tracking to verify employees meet the 5,000 annual business mile requirement. Detailed mileage logs also provide the data needed for quarterly taxability testing when drivers fall out of age compliance.
TripLog automates mileage tracking using GPS technology, helping capture business trips with the date, distance, and route information needed for FAVR programs. The app reduces manual logging errors and creates reports that support IRS substantiation requirements, which administrators can use for both program compliance and taxability calculations when needed.
Automatic tracking becomes especially valuable when performing quarterly tests for out-of-compliance drivers. TripLog’s detailed mileage reports allow for quick comparisons between FAVR reimbursements and IRS standard mileage rate calculations.
Related: Mileage Reimbursement Explained | How To Set Up a Mileage Reimbursement Policy for Your Business
Consequences of Non-Compliance
Falling out of vehicle age compliance doesn’t disqualify employees from FAVR programs, but it does trigger additional administrative work and potential tax implications.
Companies that continue paying a mixed fixed-and-variable allowance outside the FAVR safe harbor need to ensure any amount above what's deemed substantiated is treated as taxable, and the IRS requires that excess be computed periodically (at least quarterly). Many employers operationalize that by comparing payments to the standard mileage rate and taxing any excess.
For drivers, the main consequence is potentially having a portion of their reimbursement classified as taxable income. This amount gets reported on their W-2 and is subject to income tax withholding, though many high-mileage drivers would owe no additional tax after the calculation.
Employers face increased administrative burden due to tracking when drivers are out of compliance and performing regular taxability calculations. This is why many companies prefer longer retention cycles that keep more drivers in compliance, even though it means slightly lower monthly reimbursements.
The best approach is proactive communication about vehicle age requirements during program enrollment and annual reminders about updating vehicle information when employees purchase new cars.
FAVR IRS Vehicle Age Requirements FAQ
Q: What is the retention cycle in a FAVR program?
A: The retention cycle is the number of years used to calculate vehicle depreciation in your FAVR reimbursement. It determines how long the program assumes a standard vehicle will be kept before replacement, typically ranging from 3 to 7 years depending on your company’s program design.
Q: What happens if an employee’s car is older than the retention cycle?
A: If an employee’s vehicle is outside the retention period, they generally can't be treated as covered by the FAVR allowance for that vehicle during that time. You may switch them to a standard mileage rate reimbursement or continue payments while treating some or all as taxable wages, depending on how your company's program is designed.
Q: Can employees still participate in FAVR if they drive an older vehicle?
A: If their vehicle exceeds the retention period, they generally can't be treated as covered by the FAVR allowance during that time. You may offer alternative reimbursement (such as standard mileage rate) or handle payments differently depending on company policy.
Q: How is vehicle age determined for FAVR compliance?
A: Age is based on your vehicle’s model year, not its purchase date. A recently purchased 6-year-old car would still be considered 6 years old for compliance purposes, which would put you out of compliance if your program uses a 5-year retention cycle.
Conclusion
FAVR vehicle age compliance ensures employees receive fair, tax-efficient reimbursements while preventing over-payment for fully depreciated vehicles. Understanding your program’s retention cycle and how it affects your eligibility helps you make informed decisions about vehicle purchases and replacement timing.
Maintaining accurate vehicle information and detailed mileage logs with tools like TripLog simplifies compliance tracking and provides the documentation needed for both IRS requirements and quarterly taxability testing. Whether you’re in or out of age compliance, proper tracking protects both your tax-free status and your reimbursement accuracy.
Curious about setting up a FAVR system for your team? Schedule a complimentary demo with a TripLog mileage expert today to learn more!
