Accountable and Non-Accountable reimbursement plans
- An accountable plan
is a reimbursement or expense allowance arrangement under which
employees must substantiate the covered expenses to employers and
return any excess amounts received [Section 62(c)]; therefore, the
following three criteria must be met.
- Business connection,
- Substantiation, and
- Return of amount exceeding expenses.
Note - The meaning of the term "plan" in accountable plan is simply an
explicit or implicit understanding between the employer and the
employee as to the conditions of a particular reimbursement. An
accountable plan need not be in writing or cover a particular class of
employees.
- An arrangement
between an employer and employee for advances, allowances or
reimbursement of business expenses does not meet one or more of the
three basis requirements or an accountable plan is treated as a
non-accountable plan.
- Employers and employees generally view reimbursements from accountable plans as desirable because such payments are:
- Deductible by employees (subject to the 50% limit for most meals and entertainment); and
- Excluded from the employee's gross income and, thus, are exempt from income tax withholding and employment taxes.
- In contrast, when expense reimbursements are from non-accountable plans, they are:
- Includible in the employee's wages and subject to withholding and payroll taxes; and
- If deductible, such expenses are only allowed as miscellaneous itemized deductions subject to the 2% AGI limitation.
- A payment to an
employee must be a true reimbursement of an actual business expense;
payments for travel expenses made to employees, whether or not they are
expected to travel, will not qualify as accountable plan reimbursements
[Reg.1.62-2(j)].
- Even when a
reimbursement arrangement meets the technical requirements of an
accountable plan, it may still be characterized as a non-accountable
plan if the IRS find that it "evidences a pattern of abuse of the
rules" [Regs.1.62-2(k)].
- Both the substantiation of expenses and the return of excess amount must be performed within a reasonable period of time.
- The regulations offer two safe habors for satisfying the reasonable period requirement [Reg. 1.62-2(g)].
- Fixed Date Safe Harbors: Under this method, the timeliness requirement is met if the employer?s reimbursement plan requires:
a. Advance payments: An advance made within 30 days before reasonably anticipated expenses are paid or incurred; and
b. Substantiation: An expense substantiated to the employer within 60 days after expenses are paid or incurred; and
c. Return of excess amounts: the amount returned to the employer within 120 days after expenses are paid or incurred.
- Periodic Statement
Safe Harbor Method: Under this method, the employer gives each employee
periodic statements (at least quarterly) that set forth:
a. The amounts paid, in excess of expenses substantiated by the employee;
b. Request the employee to substantiate the additional amounts paid: and/or
c. Return the excess within 120 days of the date of the statements.
Note - There are no formal procedures for adopting these safe harbors; therefore, they maybe elected simply by using them.
- When establishing accountable plans, employers have the following reimbursement options:
- Dollar-for-dollar reimbursement:
- Federal per diem rate and high-low substantiation method; and
- Standard mileage allowance for employee use of personal car.
- Employer's
reporting rules for accountable plans are supposed to be very simple;
Regulations give employers three options in most cases.
- Reimburse at
Federal Rates: Whenever employers use the approved Federal rates for
mileage and/or travel reimbursements they need not make any report of
this on employee?s W-2; the plan is deemed to be a fully accountable
plan.
- Reimburse more that Federal Rate: employer must report the excess as wages on Form W-2, with full withholding.
- Reimburse less than Federal Rate: No
report is made. This is fine until the taxpayer wishes to claim expense
beyond reimbursement levels. Under audit, taxpayer must be able to show
all expenses, all reimbursements, and prove that excess expenses could
not be claimed for reimbursements.
