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Accountable Plans 101

Do you reimburse your employees for expenses incurred on behalf of your business? Hopefully, you have a written plan or policy in place that is consistent with the IRS guidelines referred to as the “accountable plan” rules. Failure to follow these guidelines will result in taxable income for employees receiving these improper expense reimbursements. Just to be sure that employers are complying with the accountable plan rules, the IRS is conducting 6,000 comprehensive employment-tax audits. With all this in mind, we felt it was a good time to revisit the accountable plan rules.

What Is an Accountable Plan?

An accountable plan is a reimbursement or expense-allowance arrangement that has three criteria that must be met to keep payments out of your employee’s wages. If the three requirements are not met, then you have a nonaccountable plan and the employee must report the payments as gross wages and subject them to all employment taxes. The three criteria are

1. business connection
2. substantiation, and
3. return of excess amounts.

Business Connection

The expense must have been incurred in connection with services performed by an employee for an employer. The expense must be allowable as a deduction by the business (meeting the requirements under Internal Revenue Code Sections 161 to 197). These are ordinary and necessary expenses incurred when conducting your trade or business.

Substantiation

To meet this requirement, the employee should keep a log, diary, statement, or similar record that states the date, time, place, amount, and business purpose of the expenses. Receipts are required if the expense is greater than $75. Electronic receipts and expense reports are allowed. Grouping of expenses into general categories is not acceptable. An example of a general category would be “travel expenses.” The IRS requires that it be broken down into smaller categories such as transportation, hotel, meals, entertainment, etc.

Return of Excess Amounts

If you provide your employee with a monthly allowance or an advance to pay for an expense, the amount in excess of the amounts substantiated or used must be returned within a reasonable period of time; otherwise it is considered taxable wages. The IRS states that this determination can be made in one of two ways — “fixed-date method” or the “periodic-statement method.”

Fixed-Date Method

Under the fixed-date method, the employer cannot pay out the advance more than 30 days before the anticipated date that the expense will be incurred. The employee must substantiate the expense within 60 days after the advance was paid or the expense incurred. Also, the employee must return any unused or unsubstantiated portion within 120 days of the advance or expense being incurred.

Periodic-Statement Method

The periodic statement method allows the employee to return any unused or unsubstantiated portion of an advance or allowance within 120 days from when the employer provides a statement detailing the amount that needs substantiation. The employer must provide this statement no less than quarterly.

Other Allowable Methods

The IRS does allow for other methods if they are reasonable and based on facts and circumstances. The two methods listed above are considered safe-harbor methods.

If the IRS finds that the substantiation requirements or reasonable-time requirements are being abused, they may deem the entire plan to be nonaccountable, making these expenses taxable to your employees and subject to payroll taxes.

A few other items of note regarding accountable plans:

• An employer can have multiple expense policies.
• A per diem allowance payment can be made under an accountable plan.
• An employer can have both accountable plans and nonaccountable plans for different types of reimbursements.
• An employer can have a more restrictive plan than the IRS, but not less restrictive, for the expenses to be deemed not reportable by the employees.
• An employee cannot compel the employer to establish a plan.

Reimbursements that do not meet the three requirements listed in the beginning of this article are considered payments made under a nonaccountable plan and are taxable wages when paid or constructively received by the employee.

The above accountable plan rules apply to most expenses. There are additional rules relating to certain expenses such as travel, gifts, spousal expenses, club dues, meals and entertainment, and auto allowances.

Please contact Kim Haumann at 312-980-3249 or your Blackman Kallick advisor with any questions.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.