Accountable And Non-Accountable Plans

Accountable Plan - Why is it important?

An employee's business expense reimbursement or allowance under a plan that qualifies as an Accountable Plan is excluded from the employee's gross income and not reported on the employee's W-2.  Further, such amounts are not subject to withholding or employment taxes.  In contrast, amounts paid under a non-accountable plan are included in the employee's W-2 (boxes 1 and 13) and deductible as miscellaneous itemized deductions, subject to the 2 percent AGI limitation. Therefore, it is important to understand the requirements for an Accountable Plan.  Treas. Reg. Sec. 1.62-2(c)(5).

Accountable Plan - What is it?

In general, an accountable plan is a plan that requires (1) employees to substantiate expenses, (2) any amounts in excess of substantiated expenses to be returned to the employer, and (3) a business connection between the amounts advanced and the expenses incurred.

Business connection

Reimbursements under an accountable plan must be for business expenses that are allowable as deductions for expenses paid or incurred by an employee in connection with his performance of services as an employee.  With respect to advances, there must be a connection between the amount of an advance and the amount of business expenses an employee is anticipated to incur.

1. Describe the company's business expenses reimbursed or advanced to employees.  Obtain a copy of the company's business expense reimbursement policy.

Substantiation

An accountable plan must require an employee to substantiate the expenses covered by the arrangement to the employer. Reg. Section 1.62-2(e)(1).  To the extent an employee business expense, such as travel or entertainment, is subject to the substantiation rules of Code Section 274(d), the plan must require the employee to provide substantiation that satisfies Code Section 274(d).

2. Does the company reimburse or make advances to the employee in connection with travel (away from home, overnight), entertainment, or use of listed property?

3. If yes, describe the company's substantiation policy with respect to such expenses.

4. If yes, does the company's substantiation policy comply with Code Section 274(d) and Reg. Section 1.274-5T?  For example, with respect to travel, is the employee required to substantiate the amount, time, place and business purpose of the expense submitted to the company?

For business expenses not subject to Code Section 274(d), a plan must require employees to provide information that is sufficient to enable the employer to identify the specific nature of each expense and to conclude that the expense is attributable to business activities. Thus, each element of an expenditure or use must be substantiated. It is not sufficient for an employee merely to aggregate expenses into broad categories, such as travel, or report individual expenses through the use of vague, non-descriptive terms, such as miscellaneous business expenses.  Reg. Section 1.62-2(e)(3). The IRS has ruled that an expense reimbursement arrangement that allows an employee to use electronic receipts and expense reports can qualify as an accountable plan if the electronic receipts and expense reports provide sufficient information to substantiate claimed expenses. Rev. Rule. 2003-106, 2003-2 C.B. 936.

5. Does the company require employees to substantiate other business expenses (e.g., business meals, transportation)?

6. If yes, describe method of substantiation (e.g., travel logs, expense reports).

7. If yes, are employees required to identify specific expenses such as business mileage or do they aggregate expenses into broad categories such as "travel" or vague, non descriptive terms such as "miscellaneous expenses"?

Return of excess amounts

An accountable plan must require an employee to return any amount in excess of the substantiated expenses. Whether an arrangement requires an employee to return amounts in excess of substantiated expenses depends on the facts and circumstances. For example, an employee who uses the excess of an advance for anticipated business expenses over the amount actually incurred in order to pay expenses incurred for other business expenses does not have to return the excess to the employer. Reg. Section 1.62-2(f)(1).

Timeliness

Both the requirement of substantiation and the requirement that excess reimbursements be returned must be satisfied within a "reasonable" period of time after the expense is paid or incurred.  What constitutes a reasonable period of time will depend on the facts and circumstances. Reg. Section 1.62-2(g). The regulations provide two safe harbor methods for determining whether the reasonable time requirement has been satisfied (1) the fixed date method and (2) the periodic statement method.

Under the fixed date method, the timeliness requirement is satisfied if an advance is made within 30 days of when an expense is paid or incurred, an expense is substantiated within 60 days after it is paid or incurred, or an excess amount is returned to the payor within 120 days after the expense is paid or incurred. Reg. Section 1.62-2(g)(2)(i). Under the periodic statement method, the timeliness requirement is satisfied if an expense is substantiated or an amount is returned within 120 days after the payor provides a periodic statement (no less frequently than quarterly) of the amount paid under the arrangement that exceeds the expenses the employee has substantiated. Reg. Section 1.62-2(g)(2)(ii).

8. Does the company use one of the two safe-harbors?

9. If yes, describe the safe-harbor method used.

10. If no, describe the company's policy as to timing of substantiation and return of excess amounts to the company.

It should be noted that there is no adverse inference intended with respect to amounts advanced, substantiated, or returned after the time periods specified in the two safe harbors. However, for purposes of withholding, an employer may treat amounts substantiated or returned after such periods as not having been substantiated or returned within a reasonable period of time. Reg. Section 1.62-2(h)(2).

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