Accountable Plan: Definition and Taxation on Reimbursements

Accountable Plan

Investopedia / Dennis Madamba

What Is an Accountable Plan?

An accountable plan is a plan that follows the Internal Revenue Service (IRS) regulations for reimbursing workers for business expenses in which reimbursement is not counted as income. This means that reimbursements are not subject to withholding taxes or W-2 reporting. However, these expenses must be business-related to fall under an accountable plan. 

Key Takeaways

  • An accountable plan is a process of reimbursing employees for their work-related costs.
  • Accountable plans are not subject to taxation, as they are not considered a form of workers' compensation.
  • Costs can only be considered part of an accountable plan if they are business-related, accurately reported, and if excess reimbursements are returned. 
  •  If a reimbursed cost is considered non-accountable, then it is subject to taxation by the IRS. Excess funds must generally be returned within 120 days.

How an Accountable Plan Works

An accountable plan differs from a non-accountable plan. If a business' reimbursement plan does not follow IRS requirements for an accountable plan, the plan is non-accountable, and reimbursement for expenses is considered part of the employee's compensation and therefore is subject to withholding and must be reported on an employee's W-2 form.

According to IRS rules, under an accountable plan, expenses are reimbursed if they are business-related and are adequately accounted for. In addition, amounts paid in excess of actual costs must be returned to the company within a specified timeframe.

Business-related expenses incurred by employees can include such things as travel, meals, lodging, entertainment, or transportation. Employees are required to adequately account for expenses with records and to return any excess reimbursement within a reasonable period of time.

Employers are not required to submit the details of their plan to the IRS, but they must be able to demonstrate that they meet the requirements of an accountable plan.

Employers are often able to utilize stricter accountable plan requirements than are posted by the IRS.

Requirements for an Accountable Plan

The requirements for an accountable plan are that they are business-related, that employee expenses are adequately accounted to their employer in a reasonable and timely fashion, and that any excess reimbursement must be returned to the employer within a reasonable amount of time.

For expenses to be considered business-related, they must (loosely) meet the following requirements: that the costs must be incurred within the course of employment, and that any expense that blends between a personal expense and a business expense is appropriately accounted for as such, splitting the expense between the employer and the employee.

A common example is that of a personal car that is used for business trips: in such a case, an employee may be expected to account for the miles that were incurred during the course of their personal transportation and work-related transportation, splitting the costs appropriately. 

Adequate accounting is typically subject to third-party confirmation for the purposes of proving that employees' funds were business-related. Receipts are a common form of third-party substantiation that employees will use to prove the legitimacy of their funding requests.

However, there are exceptions to this rule, including cases of non-lodging costs that amount to less than $75, meal reimbursement that falls within IRS per diem standards, and transportation costs for which obtaining an official proof of payment is difficult, such as taxis, subways, and busses. In general, the expectation for the return of excess reimbursement funds is that such funds are returned to the employer within 120 days of their disbursal.