What is 'Reimbursement'?

Reimbursement is compensation paid by an organization for out-of-pocket expenses incurred or overpayment made by an employee, customer, or another party. Reimbursement of business expenses, insurance costs, and overpaid taxes are common examples.

BREAKING DOWN 'Reimbursement'

Reimbursement is most commonly associated with business expenses. Many companies have policies outlining when they will reimburse employees for out-of-pocket expenses. Typically, these expenses are related to travel and can include the costs associated with hotels, food, ground transportation, and flights (travel reimbursement). Companies may also reimburse employees for other types of expenses, such as college courses or continuing education (tuition reimbursement).

In the United States, companies often use the per diem rates created by the General Services Administration (GSA). The GSA compiles reimbursement rates for various cities and states. The company may also choose to use its own methodology to set per diem rates by taking the GSA per diem rate as a base point and adjusting it factoring in company-specific factors. For example, a company may want to set a higher reimbursement rate for executives or salespeople who entertain clients. Companies may also choose to provide employees with a fixed per diem rate.

Beyond business expenses, reimbursement is also used in the insurance industry. When a health insurance policyholder needs urgent medical attention, the policyholder is unlikely to have the time to contact the insurer to determine the extent to which the policy covers expenses. The policyholder may have to pay for medication, medical services, or related expenses out-of-pocket. Alternatively, the insurance policy may require that the policyholder cover losses out-of-pocket before seeking reimbursement. In both cases, the party that paid for the expenses out-of-pocket can seek reimbursement from the insurance company for any incurred expenses covered under the insurance policy. 

Reimbursement is also common with taxes paid to state and federal governments. Most income tax payers pay an estimated amount each pay period, which does not take into account the credits that a taxpayer may be entitled to due to other taxes paid or expenditures made. Tax refunds provided to the taxpayer by the government are a form of reimbursement.

Organizations, whether businesses, insurers, or governments, have a vested interest in ensuring that reimbursements are only provided for legitimate reasons. This requires developing processes to examine fraudulent reimbursement requests. Employees, insurance policyholders, and taxpayers can file for an expense that never occurred or inflate the value of an expense.

Another situation where a company could find itself reimbursing a fraudulent expense occurs in the banking industry. For example, if an account holder falls victim to identity theft or a data breach. In this case, the bank would run an investigation to ensure that the account was indeed compromised before it reimburses the client for any funds withdrawn from the account holder's debit or credit account.

A type of reimbursement called reimbursement alimony applies to the legal sector. Reimbursement alimony is ordered by a judge and is payment made to an ex-spouse as reimbursement for time and money invested in the spouse's financial prospects and growth. A woman in a divorce settlement who worked full time to support her spouse through college may be entitled to reimbursement alimony if the spouse has graduated and is now earning income.

RELATED TERMS
  1. Reimbursable Out-Of-Pocket Costs

    Reimbursable out-of-pocket costs are dollar-for-dollar cash payments ...
  2. Before Reimbursement Expense Ratio

    The before reimbursement expense ratio measures the operating ...
  3. Reimbursement Plan

    A generic term for several types of plans that reimburse employees ...
  4. Form 2106: Employee Business Expenses

    An IRS tax form to deduct expenses incurred while conducting ...
  5. Out-Of-Pocket Expenses

    Out-of-pocket expenses refer to costs that individuals pay out ...
  6. Gross Expense Ratio - GER

    The gross expense ratio (GER) is the total percentage of a fund's ...
Related Articles
  1. Personal Finance

    10 Companies That Will Pay for Your MBA (BAC, WFC)

    Discover ten institutions of higher learning that are willing to help finance your MBA in exchange for your commitment to work for them.
  2. Insights

    Top 10 Companies That Will Pay for School (SBUX, T)

    Scrutinizing employee benefits can help people in the job market chose employers strategically to find companies that will pay for school.
  3. Taxes

    Understanding 'Per Diem'

    Per diem is one method for reimbursing employees for business-travel expenses.
  4. Insurance

    4 Common Misconceptions About Homeowners Insurance

    There are many misconceptions about homeowners insurance. These are the most common.
  5. Managing Wealth

    Buffet Reimbursed Berkshire for Postage, Phone Calls

    The Omaha-based conglomerate pays its CEO just 1.87 times its median employee salary, before stock appreciation.
  6. Insurance

    Homeowner's Insurance Guide: A Beginner's Overview

    Everything new homeowners need to know about homeowner's insurance to protect their residence.
  7. Insurance

    Why Health Insurance Premiums Will Rise in 2017

    To battle the costs and challenges of the Affordable Care Act, many health insurances are raising their premiums in 2017.
  8. Financial Advisor

    How Linked Benefit Insurance Policies Work

    Linked benefit policies can be a viable alternative to traditional long-term care insurance. Here's how they work.
  9. Taxes

    Insurance-based Tax Deductions You May Be Missing

    Do you know about all these insurance-related deductions? Knowing the tax deductions you're entitled to can make or break your bank account.
  10. Small Business

    Risks Associated With Government Contracts

    Government contracts can be rewarding, but they also come with a variety of risks.
Trading Center