Does Your Expense Reimbursement Plan Meet IRS Requirements?

Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an “accountable plan.” Meeting these requirements avoids the need to include the expense payments in employees’ gross income and avoids the employer’s share of any payroll taxes that otherwise would be due on the payments.

General Requirements

An accountable plan must meet several requirements. One is that the expense must have a “business connection,” meaning it must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Also, the employee must adequately account for expenses and return any excess reimbursement or allowance within a “reasonable period of time.” The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Safe Harbors

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic
statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Reporting Reimbursements

If the reimbursement is made under an accountable plan, the employer reports no additional income to the employee. But if an accountable plan is in place and the employee fails to substantiate the expense or fails to return any amount in excess of substantiated expenses within a reasonable period of time, then the reimbursement is subject to withholding and employment taxes. These amounts must be reported no later than the first payroll period following the end of the applicable reasonable period of time.

If the employer has a non-accountable plan — a plan that fails to meet one of the required accountable plan elements — then all amounts advanced to employees are wages and subject to both income withholding and employment taxes at the time they are paid.

Additional rules apply to per diem and mileage reimbursements.

If you would like us to review your reimbursement plan, please contact us.