Accountable vs. Nonacountable plans. Which is best?

Employee business expense reimbursements

Reimbursing an employee for business-related expenses is advantageous to all involved. Reimbursing such expenses not only helps the company meet operational goals and objectives, but may allow employees to use certain company assets in a de minimis, non-taxable way.  A system which allows for the payment of advances and charges for your employees' business expenses is called a reimbursement or allowance arrangement.  Having an accountable or a non-accountable plan determines how you report a reimbursement or allowance. You must specify the amount of the reimbursement when a single payment includes both wages and an expense reimbursement.

These rules apply to all allowable ordinary and necessary employee business expenses.  Now here is the breakdown of accountable and non-accountable plans:

 

Accountable plan

An employer’s reimbursement/allowance arrangement must require its employees to meet all three of the following rules in order to be considered an accountable plan:

1.      The employee must have paid or incurred allowable expenses while performing his or her duties as the taxpayer’s employee. The reimbursement or advance must be payment for the expenses and not paid to the employee as wages.

2.    The employee must provide documentary evidence of the expenses to his or her employer within a reasonable timeframe.

3.    The employee must return any funds in excess of substantiated expenses to their employer within a reasonable period of time.

Accountable plan payments aren't wages and, as such, income tax, social security, Medicare, and FUTA taxes do not apply.

Payments made may be treated as under a non-accountable plan if the expenses covered by this arrangement aren't substantiated or any amounts in excess of substantiated expenses aren't returned within a reasonable period of time Income tax, social security, Medicare, and FUTA taxes will apply to any accountable plan amounts re-characterized as non-accountable plan payout in the pay period following the reasonable period of time that was allowed.

Specific facts and circumstances will drive what constitutes a “reasonable period of time”. However, it is considered reasonable if the employee gets an advance within 30 days of the time they pay or incur the expenses. They would then be expected to adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the funds were disbursed. Another option that would be considered reasonable is providing employees a (no greater than) quarterly periodic statement that requires the employee to either return or adequately account for outstanding amounts within 120 days of the disbursement of funds.

 

Non-accountable plan

Non-accountable plan payments to your employee for travel and other necessary expenses of your business are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Non-accountable plan payments are treated as such if the following rules apply:

• Your staff-member isn't required to or doesn't provide supporting documentation, 
• Advances are made to an employee for business expenses but he or she isn't required to or doesn't (timely) return any amount he or she doesn't use for business expenses,
• You advance or pay an amount to your employee but you have no reasonable expectation the employee will use such funds for expenses related to your business, or
• You pay the employee an amount as a reimbursement that you would have otherwise paid as wages.

Employers should consider the many advantages of having an accountable plan versus a non-accountable plan. Employers would be wise to implement an accountable plan even just as a tool to attract and retain quality employees. If you are an owner/employee of the business, implementing a tax-advantaged accountable plan that could potentially defray thousands of dollars in income and payroll taxes on advances and reimbursements made for business expenses is pretty awesome. Contact your tax planner for more information and if you don’t have one, feel free to contact me for recommendations.

 

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