Accountable Reimbursement Plans

The IRS continues to look closely at the substantiation of employee expenses and reimbursements.  Does your institution have proper policies/procedures in place in this area? 

We like to ask our clients:

• Does your organization have an accountable expense reimbursement plan in accordance with IRS guidelines for expense reimbursements?

• If so, is your plan in writing and made available to all employees through an employee manual or other published means?

• Do you have a policy in place where a board member reviews and signs off on the President’s credit card (or other reimbursed) expenses?

While this third item may not be mandated by the IRS, it can be a great “best practice.”

To be an accountable plan, the IRS says that your “employer’s reimbursement or allowance arrangement” must include all of the following rules.

1. Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.

2. You must adequately account to your employer for these expenses within a reasonable period of time.

3. You must return any excess reimbursement or allowance within a reasonable period of time.

For more on this, check out IRS Publication 463 at this link:

2024 Publication 463

Here are some “notes” - Paraphrased from Recent IRS Exam “Advisories”:

During our examination of the organization’s Form 990, and related records, we determined that you made reimbursements to employees without sufficient documentation to support the amount of the expenses.  In order for a reimbursement plan to be considered “accountable” the reimbursed expenses must meet the requirements of Treasury Regulation 1.62-2 (d), (e), and (f).

1.62-2(d) Business connection. In general. Except as provided in paragraphs (d)(2) and (d)(3) of this section, an arrangement meets the requirements of this paragraph (d) if it provides advances, allowances (including per diem allowances, allowances only for meals and incidental expenses, and mileage allowances), or reimbursements only for business expenses that are allowable as deductions by part VI (section 161 and the following), subchapter B, chapter 1 of the Code, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer.

1.62-2(e) Substantiation. In general. An arrangement meets the requirements of this paragraph (e) if it requires each business expense to be substantiated to the payor in accordance with paragraph (e)(2) or (e)(3) of this

section, whichever is applicable, within a reasonable period of time.

1.62-2(f) Returning amounts in excess of expenses. In general. Except as provided in paragraph (f)(2) of this section, an arrangement meets the requirements of this paragraph (f) if it requires the employee to return to the payor within a reasonable period of time may amount paid under the arrangement in excess of the expenses substantiated.

If an arrangement doesn’t satisfy on or more of the requirements of paragraphs (d), (e), or (f) of the section, all amounts paid under the arrangement are treated as paid under a “non-accountable plan.”  Amounts paid under a non-accountable plan are included on an employee’s W-2 and subject to withholding and payment of employment taxes (FICA/FUTA/RRTA).   

(**Please note that the IRS abbreviated their points from Treasury Reg. 1.62.2.  Underlines added.)

From Internal Revenue Code Section 274(d):

No deduction or credit shall be allowed-

(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),

(2) for any expense for gifts, or

(3) with respect to any listed property (as defined in section 280F(d)(4) ), unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement:

(A) the amount of such expense or other item,

(B) the time and place of the travel or the date and description of the gift,

(C) the business purpose of the expense or other item, and

(D) the business relationship to the taxpayer of the person receiving the benefit.

It would be wise to consult with your tax advisor to ensure that your “accountable plan” is up-to-date.  Or, if you do not have one, ask them about a template or model.

Written byDavid C. Moja, CPA www.mojacompany.comThe information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.