An accountable plan is a structured approach that adheres to IRS regulations for reimbursing employees’ business-related expenses without counting it as income. This means reimbursements under an accountable plan are exempt from withholding taxes and W-2 reporting. However, these expenses must be directly related to the business to qualify under this plan.
How an accountable plan works
Accountable plan vs. non-accountable plan
An accountable plan, compliant with IRS regulations, allows businesses to reimburse employees for business-related expenses without taxing such reimbursements. On the other hand, a non-accountable plan does not adhere to IRS rules, leading to reimbursement being treated as part of the employee’s compensation subject to withholding and W-2 reporting.
IRS guidelines for accountable plans
According to IRS rules, accountable plans mandate that expenses are reimbursed only if they are directly related to business activities and properly accounted for. Any overpaid amounts exceeding actual costs must be returned to the company within a specified timeframe.
Business-related expenses covered under accountable plans encompass travel, meals, lodging, entertainment, and transportation. Employees are obligated to furnish accurate records of expenses and return any excess reimbursements within a reasonable timeframe.
Employer requirements and stricter guidelines
While employers aren’t obligated to submit their plans to the IRS, they must demonstrate compliance with accountable plan standards. Often, employers implement stricter guidelines than the IRS requires.
Requirements for an accountable plan
Business-related expenses criteria
Expenses considered business-related must align with specific criteria: they should occur within the scope of employment, and costs that blur between personal and business expenses must be appropriately divided between the employer and the employee.
For instance, an employee using a personal car for business trips may need to document the mileage incurred for personal versus work-related transportation, allocating costs accordingly.
Adequate accounting and exceptions
Adequate accounting usually involves third-party confirmation, often in the form of receipts, to validate the legitimacy of employees’ funding requests. However, there are exceptions, like costs below $75, meal reimbursements within IRS per diem standards, and transportation expenses where obtaining official proof of payment, such as for taxis or subways, is challenging.
The general expectation for excess reimbursement funds is their return to the employer within 120 days of disbursement.
Here is a list of the benefits and the drawbacks to consider.
- Exemption from taxation on reimbursed expenses
- Encourages proper documentation of business-related costs
- Stringent requirements for expense reporting
- Return of excess reimbursements within a specified timeframe
Frequently asked questions
What happens if an expense isn’t considered business-related under an accountable plan?
If an expense fails to meet the criteria for business-related costs, it could be treated as taxable income by the IRS.
What is the time frame to return excess reimbursement under an accountable plan?
Usually, excess funds should be returned to the employer within 120 days of their disbursement.
Are employers required to submit their accountable plans to the IRS?
While not mandatory, employers should be able to demonstrate that they meet the standards of an accountable plan.
- An accountable plan exempts business-related expense reimbursements from taxation.
- Employees must adhere to proper expense reporting and return any excess reimbursements within a specific timeframe.
- Businesses often implement stricter guidelines for accountable plans than those required by the IRS.
View article sources
- Expense Reimbursement – accountable Plan – Kent State University
- IRS Accountable Plan Requirements – University of California, Irvine
- What you need to know about Accountable Plans – Internal Revenue Service
- Understanding the Employee Retirement Income Security Act (ERISA): History, Purpose, and Benefits – SuperMoney