How to make accountable plans work effectively

An accountable plan is a reimbursement arrangement that meets these 3 conditions:

1.      The expenses must have a business connection. This means they must have paid or incurred deductible expenses while performing services as an employee of the employer.

2.      The employee must adequately account to the employer for these expenses within a reasonable period of time. A reasonable period is 60 days after the expenses are paid or incurred. If an employer reimburses an employee’s driving using the IRS mileage rate (54.5 cents per mile in 2018), then costs need not be substantiated, but other elements of business driving (date, mileage, destination, etc.) must be reported to the employer using an expense account report, app, or other written record.

3.      The employee must return to the employer any excess reimbursement or allowance within a reasonable period of time. A reasonable period here is 120 days after the expenses are paid or incurred. If an employer gives an employee a certain amount each month to cover his or her expenses without regard to actual costs, this is simply additional compensation and not a reimbursement under an accountable plan.

If all 3 conditions aren’t met, the reimbursement arrangement is treated as a non-accountable plan. This means the reimbursements are taxable compensation to the employee and subject to employment taxes. You can’t opt to reimburse employees under an accountable plan for items that are not deductible by you; this reimbursement is treated as being under a non-accountable plan.

If you want to adopt an accountable plan, there is no IRS form for this purpose. In fact, there’s technically no requirement to have the plan in writing, but you should do so. And if you’re incorporated, it’s a good idea to reflect the adoption of the plan in your corporate minutes.

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