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. However, reimbursement is not subject to taxation.

Key Takeaways

  • Reimbursement is money paid to an employee or customer, or another party, as repayment for a business expense, insurance, taxes, or other costs. 
  • Business expense reimbursements include out-of-pocket expenses, such as those fro travel and food. 
  • Insurance reimbursement includes repayment for expenses repaid to the insured, such as medication. Tax refunds are a form of reimbursement. 
  • Per diem rates are daily rates paid to employees as reimbursement for business trips. 

Understanding 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).

Types of Reimbursement

Insurance

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. 

Taxes

Reimbursement is also common with taxes paid to state and federal governments. Most income taxpayers 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.

Legal

A type of reimbursement called reimbursement alimony applies to the legal sector. Reimbursement alimony is ordered by a judge and is a 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.

Requirements for Reimbursement

In the U.S., 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.

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.