*adapted from The Tax Book - 2011 Tax Year
An accountable employee reimbursement plan allows employers to reimburse their employees without having to add that amount to the employee’s income. It also allows the employer to expense the purchases, as allowable. However, certain guidelines must be followed in order to ensure that the reimbursements are allowable.
Why have an accountable plan?
The main benefit of an accountable plan (versus a nonaccountable plan) is that the reimbursement amounts are tax-exempt for the employee receiving the reimbursement. If the plan is nonaccountable, then the amounts are taxable income for the employee receiving the reimbursement.
Qualifications of an Accountable Plan
- Have paid or incurred deductible expenses while performing services as an employee
- Adequately account to the employer for these expenses within a reasonable period of time
- Return any excess reimbursement or allowance within a reasonable period of time
Reasonable Period of Time
There is some variation, according the facts and circumstances of the situation, as to what qualifies as a reasonable period of time. Following is a list of reasonable time frames:
- The employer reimburses an expense within 30 days of the time the employee incurred the expense
- The employee adequately accounts for the expense within 60 days after the expense was paid or incurred.
- The employee returns an excess reimbursement within 120 days after the expense was paid or incurred.
- The employer gives the employee a periodic statement, at least quarterly, that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the date of the statement.
If the employer decides to pay the employer in advance of the employer actually incurring the expenses, the following requirements must also be met (in addition to the qualifications for an accountable plan):
- Reasonable calculation of the allowance amount is done so as not to exceed the amount of anticipated expenses.
- The employer makes the advance within a reasonable period of time.
Per Diem Option
Instead of an amount-specific reimbursement, an employer may choose to set-up a per diem allowance for travel, lodging, meals and incidentals. This could be based upon travel days, miles, or another fixed allowance. For rates, see: http://www.irs.gov/pub/irs-pdf/p1542.pdf
Please keep the following factors in mind:
- Amount must not exceed the federal rates
- Employees must substantiate the time, place, and business purpose of the trip
- Employees are not required to submit receipts to the employer if using a per diem allowance
Within the above guidelines, there is flexibility as to exactly how your company sets up an accountable reimbursement plan. Following are a few examples of some practical applications.
The employer requires the employee to submit reimburseable receipts within 2 weeks of the date the expense was incurred, along with an explanation of the expenses’ business purpose. The employer then writes a check to the employee for the amount of the expense. The employer retains records of the expenses and reimbursement.
An employee travels out-of-town. The employee provides the employer with the time, place, and business purpose of the trip to be reimbursed. The employer writes a check for the employee, based upon the federal per diem rate for that location. For rates, see: http://www.irs.gov/pub/irs-pdf/p1542.pdf
The employer assumes that the employee will have reimburseable expenses. After a reasonable calculation for the expected expenses, the employer pays money to the employee. At the end of the month, the employee provides the employer with receipts for the expenses and any excess allowance.
However your corporation structures employee reimbursement, it is important that the policy is part of the corporate documents. Having the policy on file will help in the case of any IRS scrutiny.