What Is An Accountable Plan for Reimbursing Employees?

How an Accountable Plan for Reimbursing Employees Works

An accountable plan is a detailed plan or arrangement in which employers give employees an allowance or reimburse them for certain expenses, limiting the amounts to actual expenses. The purpose of an accountable plan is to make the amounts non-taxable to employees.

 To be considered an "accountable plan" by the Internal Revenue Service (IRS), the employer’s arrangement with employees must include all of the following:

1. The expenses must have a business connection; that is, they must have been paid or incurred while the person is performing services as an employee. 
2. The employee must adequately account to the employer for these expenses within a reasonable time. You must require employees to provide you with detailed information on these expenses, including the date, time, place, amount, and business purpose for the expense. 
3. The employer must require the employee to return excess reimbursements within a reasonable and specific period of time, depending on the circumstances. If employees are not required to turn in excess amounts, these amounts must be included in their income and they increase the cost of the benefit.

If all three of these requirements are not met, the plan is determined by the IRS not to be accountable.

Accountable plans may include reimbursement for a number of different employee-related expenses, including travel expenses, meals, and equipment purchases.

The accountable plan must include details on how employees account for their expenses. It must include a procedure requiring employees to return excess reimbursements (those in excess of allowable amounts) to the employer.

Excess Reimbursements

An excess reimbursement is a reimbursement greater than allowable amounts. If the employee doesn't return excess reimbursements within a reasonable period of time, these excess amounts may be taxable to the employee. 

 The most common circumstance would be a case in which you give an employee an advance before they leave for a trip, and the expenses during the trip are less than the amount advanced. The employee in this case has an excess amount that must be returned to your company.

 A reasonable period of time for a return of excess reimbursements is determined by the IRS as, for example:

• An advance is received within 30 days of the time of the expense.
• An adequate account of expenses within 60 days after they were paid or incurred.
• The return of any excess reimbursement within 120 days after it was paid or incurred.
• A statement from your company (at least quarterly) that requests a return or adequate accounting for outstanding advances, and the employee complies within 120 days after receiving the statement.

Accountable Plans and Business Taxes

You don’t have to submit an accountable plan to the IRS, but you must be able to prove these expenses were business-related at a tax audit.  Driving expenses, for example, must show the date, time, place, amount, and business purpose for the expense.  

Document all transactions with employees for their reimbursements of expenses, requiring them to give you records to show that all requirements of the accountable plan were followed. It's a good idea to put these requirements in writing, as part of your employee policy and procedures manual.

Frequently Asked Questions (FAQs)