Excess Benefit Transactions

Reimburse Expenses With An Accountable Plan To Reduce Taxes

If you’re seeking an affordable method to attract and retain staff members without straining your non-profit’s finances, you might want to explore the option of implementing an accountable plan. This simple and cost-effective approach allows you to reimburse employees for their out-of-pocket expenses free from income and employment taxes. Here are the details.

Reasonable Reimbursements

Accountable plan reimbursement payments aren’t subject to income or employment taxes. That’s a big bonus for employees who, for example, travel frequently for work or often pay for work-related supplies out of their own pocket. Your organization also can benefit because reimbursements aren’t subject to the employer’s portion of federal employment taxes.

The IRS stipulates that all expenses covered in an accountable plan have a business connection and are ‘reasonable.’ In addition:

  • You can’t reimburse employees more than they paid for any business expense
  • Employees must account for their expenses
  • If an expense allowance was provided, employees must return any excess allowance within a reasonable time period

Examples of expenses that might qualify for tax-free reimbursements through an accountable plan include tools and equipment, home office supplies, dues, and subscriptions. Certain meal, travel, and transportation expenses also qualify.

Establishing An Accountable Plan

How do you establish an accountable plan? Although your plan isn’t required to be in writing, formally documenting it will make proving its validity to the IRS easier if it’s ever challenged.

When administering your plan, you’re responsible for keeping reimbursement or expense payments 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 can’t substitute tax-free reimbursements for compensation that employees otherwise would have received.

The IRS also requires employers with accountable plans to keep good records. This includes documentation of the amount of the expense and the date; place of the travel, meal, or transportation; the business purpose; and the relationship of the participants to your organization. You also should require employees to submit receipts for expenses of $75 or more and for all lodging unless your non-profit uses a per diem plan.

Potential Drawbacks

There are potential drawbacks to offering an accountable plan — for instance, increased administration time and costs. Contact us to discuss the pros and cons.

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