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Welcome to the IRS presentation on Accountable Plans.

This video provides you with the understanding of accountable plan rules and requirements that are common to government entities.

How an employer reports a reimbursement or allowance amount depends on whether the entity has an accountable or nonaccountable plan. Before we begin, please note this information isn’t official guidance. Now let’s get started.

Employees often incur expenses in connection with their jobs. For example, employees travel and must pay for airfare, hotels, meals, etc. Many employers reimburse their employees for these expenses.

These expenses may be reimbursed under: An accountable plan, or a nonaccountable plan Let’s talk now about accountable plans.

When we use the term "accountable plan," we're not necessarily speaking about a written plan.

There is no requirement the plan be written, but it must be an established policy.

Many government entities document their accountable plan in a written policy.

An accountable plan allows an employer to reimburse employees on a non-taxable basis when certain requirements are met.

Accountable plan rules are detailed in Section 62(c) of the Internal Revenue Code.

Publication 5137, Fringe Benefit Guide, contains helpful information related to this topic.

The following three requirements under Treasury Regulations 1.62-2 must be met for reimbursements to be paid under an accountable plan: Business connection, Substantiation, and Return of excess. Now I will discuss each accountable plan requirement separately.

For the accountable plan rules, a business connection is defined as those expenses incurred by the employee for services performed as an employee for the entity. The reimbursement or advance must be payment for the expenses and must not be an amount that would have otherwise been paid to the employee as wages.

Let me give you an example of an expense that meets the business connection requirement.

If an employee incurs airfare costs to attend an out-of-town conference which directly related to their job, the cost of the airfare would qualify. This means if the expense was not reimbursed by the employer, it would be deductible by the employee on their Form 1040 income tax return as a business expense.

Please note the employee business expense must be "allowable" and need not actually be deductible by an employee.

Check the IRS Publication 535, Business Expenses, if you are unsure whether an expense would qualify.

The employee must submit documentation regarding the expenses incurred to substantiate the expense.

The employee must verify the date, time, place, and business purpose of expenses, as well as the amount of the expenses.

The employee must provide receipts to the employer. Most employers require employees to submit expense reimbursement vouchers with receipts attached to it.

For example: your employee drives their personal vehicle for business.

They submit a log listing the date and time, the business purpose and the mileage.

The information provided meets the substantiation requirement. The employer calculates the reimbursement by multiplying the business miles times the applicable federal business standard mileage rate.

The reimbursement is excludable from wages under an accountable plan.

Some employers give their employees an expense allowance in advance of when the employee incurs the expenses.

When this occurs, the employee must return any excess allowance over the expenses incurred within a reasonable period of time.

If the excess is not returned, only the excess allowance over the amount substantiated is includible in wages.

A “reasonable” period of time will depend on the facts and circumstances of each case. A reasonable period of time is when: an advance is allowed up to 30 days prior to the expense being incurred or paid, the expense is substantiated within 60 days after it is paid or incurred, and any excess amount is returned to the employer within 120 days after the expense is paid or incurred.

This is also known as the fixed date method of timeliness safe harbors.

For example: Your employee receives an expense allowance of $500 for a business trip.

She submits documentation for $300 on business expenses and does not return the $200.

You must include the excess of $200 in their wages.

If you would like information on safe harbor timeliness rules, refer to Publication 5137, Fringe Benefits Guide.

When any of the three requirements aren’t met, the plan is considered a nonaccountable plan.

Payments you make under a nonaccountable plan are taxable wages to the employee.

The employer must withhold employment taxes from the reimbursements to the employee.

For example, if you provide your employees with a clothing allowance and you don’t have them provide receipts, then you have a nonaccountable plan. The allowance is taxable as wages to the employee since the business use is not substantiated.

Employers can have both accountable and nonaccountable plans for different types of reimbursements.

They could have an accountable plan for travel expenses and nonaccountable plan for mileage.

Employers may have more restrictive plans than the IRS, but not less restrictive for excludable treatment.

If an employer has an accountable plan but an employee doesn’t timely account for the expenses or return excess amounts, the employer must withhold employment tax no later than the first payroll period following the end of the reasonable period.

If advance and reimbursements are made under a nonaccountable plan, withholding is required when the advance or reimbursements are made to the employee. For example, if you pay your employee $300 a month to drive their personal vehicle for business appointments and don’t have them account for their mileage, then it is a nonaccountable plan. Employment taxes should be withheld when the $300 is paid to the employee.

In summary, under accountable plans allowances or reimbursements paid to employees for job-related expenses are excluded from wages. An accountable plan doesn’t need to be in writing, you only need to have the policy in place for your allowances or reimbursements related to business expenses your employees may incur. All three requirements of the accountable plan rules must be met (business connection, substantiation, and return of excess), otherwise it’s a nonaccountable plan and any reimbursements are taxable to your employees and included in their wages.

Thank you