Accountable & Non-accountable Reimbursement Plans

 

The arrangement under which an employer reimburses business expenses incurred by employees or provides advances to cover such expenses is either an accountable or non-accountable plan.

The federal tax treatment of each plan is summarized below.

Accountable Plans

Amounts paid under an accountable plan are deductible by the employer as business expenses and are not reported as taxable income to the employee. They are not reported on the employee's Form W-2 and are not subject to federal income tax withholding, social security tax withholding, medicare tax withholding, or Federal Unemployment Tax (FICA and FUTA).

Non-accountable Plans

Amounts paid under a non-accountable plan are deductible by the employer as “compensation” reportable on the employer's Form W-2 and subject to withholding as supplemental wages.

Expense reimbursements that are subject to withholding may be added to the employee's regular wages for the appropriate payroll period and withheld payroll taxes may be withheld on the total.

Specific Rules for Accountable Plan Treatment

Accountable plans have the following 3 requirements:

1-the expenses covered under the plan must have a business connection,

2-the plan must require the employees to document and document and substantiate the covered expenses within a reasonable period of time, and

3-the plan must require the employees who receive advances to return any amounts in excess of their documented and substantiated expenses within a reasonable period of time.

If the above rules for accountable plans are not strictly followed, employer reimbursements will be deemed to be made under a non-accountable plan.

It is good practice to put the plan in writing to document and substantiate all expense reimbursements. This will provide valuable evidence should an IRS Tax Audit occur.

This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
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