What Is a Reimbursement Plan?
A generic term for several types of plans that reimburse employees for various types of work-related expenses. These expenses can include medical, auto, travel, meal, and entertainment costs. Reimbursement plans are instituted by employers in order to allow them to pay for a more accurate amount of employee expenses incurred, instead of having to provide a broad allowance or increase in compensation to cover them.
Understanding Reimbursement Plan
Reimbursement plans can take many forms, such as accountable and non-accountable plans, de minimis fringe benefits, or automobile mileage and travel allowances. Employees cannot take personal deductions of any kind for expenses that are covered under a reimbursement plan. Employees must submit adequately-detailed records of expenses via logs or receipts in order for employers to be ableto deduct the reimbursements.
IRS Publication 535, Business Expenses, states the following: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Certain states like California require employers to reimburse employees’ reasonable work-related expenses, and any expense reimbursements received do not have to be reported as wages or income. But in order for this to happen, employers must pre-establish a written accountable plan, and the employees submit properly documented expenses under that plan. This is to ensure that the expense records are properly maintained in a timely and accurate manner. Many businesses have accountants or employment counsel substantiate the expenses and ensure correct reporting and deductions.
A breakdown of some common examples of workplace expenses that would require employer reimbursement include the following:
- Transportation: The cost of any work-related travel, including vehicle expenditures, meals, lodging, and any entertainment expenses that meet the criteria detailed in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. A high number of employers will reimburse employees who use their personal vehicles for business causes at a standard mileage rate, which is annually set by the IRS. For example, the standard federal mileage rate for business in 2021 is 56 cents per mile (57.5 cents per mile for 2020). Generally, routine commuting expenses between an employee’s home and workplace are not considered reimbursable.
- Supplies: Any necessary goods that an employee purchases can be reimbursed at cost, provided that they are reimbursed pursuant to an accountable plan.
- Meals and Entertainment: Meal and entertainment costs incurred within an employee's tax home are reimbursable, but only if the meals/entertainment in question have demonstrable business purposes.