6 Best Practices for Keeping Your Accountable Employee Expense Reimbursement Plan Intact
By Leah Davis, CPA
An accountable employee expense reimbursement plan allows you to cover employees’ out-of-pocket business expenses via tax-free reimbursements or advances. The IRS says this type of plan must follow three rules to maintain its “accountable” (i.e., tax-free) status. But here’s the thing: following these rules can be costly and even complicated.
The Society for Human Resources Management estimates that expense reimbursement payments average $50 of administrative and overhead costs per reimbursement. And then there’s the risk. Under an accountable plan, if one—just one—of your reimbursements or advances doesn’t follow the rules, the IRS could disqualify your entire plan not only for the current year but also retroactively, which could result in a staggering amount of back taxes, penalties, and amendment costs.
Nevertheless, an accountable plan can be a valuable perk for both you and your employees. But if you’re going to have one, it’s critical to follow the IRS’ three rules as efficiently and effectively as possible. Here are six best practices to help you do it right:
1. Establish a structured, documented, and consistent internal accountable reimbursement policy.
An internal accountable reimbursement policy can help get everyone in your company on the same page about the rules. (With training for managers and employees, of course.) For starters, your policy should define what’s considered a deductible business expense as well as the time periods in which employees must submit substantiation. If needed, this type of policy shows the IRS that your company takes a consistent approach to employee reimbursements and advances.
2. Consider establishing vendor accounts and/or company credit cards.
This can help to reduce employee reimbursements and simplify repeat expenses. Although employees still have to turn in receipts and documentation (i.e., substantiate their expenses), this eliminates the need to issue employee checks and/or receive excess advance repayments. Examples: Amazon business accounts, pre-approved travel/lodging vendor accounts, etc.
3. Adopt dual plans to facilitate non-business expense payments/advances.
Be very cautious about an expense that straddles the line between a nondeductible business expense and a qualified business expense. To be safe, adopt a conservative definition of what qualifies as a deductible business expense, and consider having a separate plan to reimburse nondeductible business expenses as compensation.
4. Designate the right person to examine and approve all submitted substantiation.
This employee should know the definition of a deductible business expense and have the authority and ability to approve expense reimbursement requests—and should not be receiving reimbursements or advances. Most important, this person should understand the rules for preserving the plan’s accountable status.
5. Process expense reimbursements separately from payroll.
Combining these functions simply broadens the amount of information that could be discoverable in an audit. Many payroll systems allow for this, which makes it tempting, but it’s rarely a good idea.
6. Leverage technology and systems to streamline expense reimbursement processes and turnaround.
Software platforms and applications can absolutely offer a time- and cost-saving solution. To name a few: Google Forms to track mileage, ADP, Concur, etc.
Balance the risk of not doing it right with the cost of doing it right.
Although an accountable plan allows you to make tax-free reimbursements and advances to cover your employees’ out-of-pocket expenses (a significant perk!), it could also put your company at risk if you’re not following the rules. And while following these best practices could certainly minimize your risk, they could also be costly to implement. Keep in mind there are other solutions for covering employees’ out-of-pocket expenses, such as stipends. If you have questions about the best solution for your company, please let me know.