What is the Difference between an Accountable Vs. a Non-Accountable Plan When Reimbursing Employee Expenses?
April 14, 2022
According to the IRS, employees can be reimbursed for eligible expenses either via an “accountable” or a “non-accountable” employee reimbursement plan.
To be recognized as an accountable plan, reimbursements must meet the following conditions:
- The employee’s reimbursed activities must have a direct connection to the business and the job responsibilities.
- The employee must provide an accurate accounting to you as the employer of how the reimbursement money was spent.
Typically, an employee will use an expense report to provide this type of information with receipts as substantiation. Expenses over $75 and all lodging expenses require a receipt or some other documented proof of spending. Employees need to return any excess reimbursements within a reasonable period of time.
There are two methods of determining a “reasonable time”:
- a statement from the employer is given to the employee at least quarterly, setting forth the amounts paid under the plan in of the substantiated amount and requesting the employee either substantiate or return excess amounts within 120 days of the statement date
- Advance Payments – 30 days before the reasonably anticipated expenses are paid or incurred
- Substantiation – 60 days after expenses are paid or incurred
- Return of excess amounts – 120 days after expenses are paid or incurred
An employer’s reimbursement plan is considered non-accountable if it fails to meet any of the above requirements of an accountable plan.
The difference between an accountable and a non-accountable plan is how the payments are treated for tax purposes. They are either included as part of the employee’s gross income or excluded. For accountable plans, the reimbursement or excess amount is excluded from income and is not subject to withholding taxes. In non-accountable plans, the reimbursement or excess amount is included in income and subject to withholding taxes.
How AbitOs Can Help
Whether you are subject to reporting accountable vs. non-accountable employee expense reimbursements is not as simple as you might think. An employer can have an accountable plan for some items and a non-accountable plan for others. Furthermore, Even if your organization has an “accountable plan,” it is still possible that some payments will be treated as “non-accountable.” This occurs in cases when an employee fails to return excess reimbursements. It also applies to the reimbursement of non-deductible expenses related to the employer’s business.
If you have employees that regularly receive reimbursements for their work-related expenses, to avoid any issues with the IRS, it is imperative that you understand which type of reimbursement plan you are subject to – accountable or non-accountable – so that you deduct any necessary withholding taxes and report your employees’ income properly.
Our business and payroll tax experts will be happy to analyze your reimbursement schedules and reporting practices to make sure you are in complete compliance with the applicable tax law.
AbitOs specializes in the unique accounting needs of high net-worth individuals with international lifestyles as well as for entities doing business in LATAM and across the globe. Complying with the tax implications of employee reimbursement plans can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Alert, do not hesitate to contact us.