Accountable plans reimburse employees for work-related expenses free of federal income and employment taxes. Reimbursement payments are not subject to withholding from staffers’ paychecks, and your non-profit also benefits because the reimbursements are not subject to the employer’s portion of federal employment taxes.
Most prospective employees probably will not accept a job based on the availability of an accountable plan but offering one can help you retain valuable workers who submit frequent reimbursement requests.
What is Covered?
The IRS stipulates that all expenses covered in an accountable plan have a business connection and be ‘reasonable.’ In addition, employers cannot reimburse employees more than what they paid for any business expense. Employees also must account to you for their expenses and, if an expense allowance was provided, return any excess allowance within a reasonable time period.
Examples of expenses that might qualify for a tax-free reimbursement through an accountable plan include tools and equipment, home office supplies, dues, and subscriptions. Certain meal, travel, and transportation expenses also qualify.
How do you establish an accountable plan? It is not required to be in writing. However, formally documenting your plan makes it easier for your non-profit to prove its validity to the IRS if it is challenged.
When administering your plan, your non-profit is responsible for identifying the reimbursement or expense payment and keeping these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your non-profit, you cannot substitute tax-free reimbursements for compensation that employees otherwise would have received.
Keep Good Records
The IRS also requires employers with accountable plans to keep good records for expenses that are reimbursed. This includes, to the extent applicable, documentation of:
- The amount of the expense and the date
- Place of the travel, meal, or transportation
- Business purpose of the expense
- Business relationship of the people fed
You also should require employees to submit receipts for any expenses of $75 or more and for all lodging unless your non-profit uses a per diem plan.
Because plans do not have to be formal, they are relatively simple to establish. Contact us if you need assistance setting up an accountable plan.