Accountable Plan vs Non-Accountable Plan

An accountable plan is an expense reimbursement arrangement that meets three IRS rules, so the payments are not wages. A non-accountable plan misses at least one rule, and every dollar becomes taxable pay.

Reimbursing against receipts does not make a plan accountable by itself. The arrangement must require proof and the return of any excess. For driving costs, see our gas and mileage reimbursement guide and federal gas rate page.

What Makes a Reimbursement Plan Accountable?

Under IRS Publication 15, the arrangement must require employees to meet all three of these rules:

• Business connection: they paid or incurred allowable expenses while working for you, and the payment is not disguised wages.
• Substantiation: they document each expense within a reasonable period of time.
• Return of excess: they give back any advance above substantiated expenses within a reasonable period of time.

Miss any one rule and the arrangement is non-accountable. Treasury Regulation 1.62-2 sets these tests.

How Long Do Employees Have to Substantiate and Return Funds?

A reasonable period depends on the facts, but the regulation's safe harbors are clear. An advance within 30 days of the expense, substantiation within 60 days, and return of excess within 120 days all count as reasonable.

A quarterly statement asking employees to account for or return outstanding amounts also works if they respond within 120 days, per Publication 15. Employers that routinely overpay to avoid withholding lose these safe harbors.

Miss a deadline and the unsubstantiated or unreturned amount is non-accountable. It becomes taxable in the first payroll period after the reasonable period ends.

How Is a Non-Accountable Plan Different?

Non-accountable payments are wages. They count as supplemental wages subject to federal income tax withholding, Social Security, Medicare and FUTA taxes, and the employer reports them in box 1 of Form W-2.

A flat allowance paid whether or not the employee is expected to have business expenses is non-accountable. So is any payment that replaces wages.

What Does the Plan Type Mean for Employees?

Under an accountable plan, the employee owes no tax on the reimbursement, and Publication 463 says it should not appear in box 1 of the W-2.

Under a non-accountable plan, the money is taxed as pay. For tax years beginning after 2017, most employees cannot deduct unreimbursed work expenses. Only Armed Forces reservists, qualified performing artists, fee-basis government officials and employees with impairment-related work expenses can.

That is federal tax treatment only. Some states also require employers to reimburse business expenses, so check your state's rules.

How Does HR Cloud Help With Reimbursement Policies?

HR Cloud's pages describe an HRIS and payroll integrations, not expense reimbursement processing. People HRIS offers secure document storage with version tracking and workflows that automate approvals and task assignments.

Its payroll integrations connect with ADP, QuickBooks, UKG and other providers so employee data stays consistent. To see how it fits your setup, request a demo.

Frequently Asked Questions

Q: Can a per diem or fixed allowance be part of an accountable plan?

A: Yes, if it stays within federal rates and employees still prove time, place and business purpose. Any excess is wages, and Publication 15 has employers report the substantiated portion in box 12 with code L.

Q: What counts as adequate substantiation?

A: A statement of expense, account book or diary entered at or near the time of the expense, with documentary evidence such as receipts, as Publication 463 describes.

Q: Can an employee make a non-accountable plan accountable by submitting receipts later?

A: No. The employer chooses the plan type. Employees cannot convert non-accountable payments by voluntarily accounting for expenses or returning excess funds, according to Publication 463.

Q: How large can an expense advance be?

A: The regulation says an advance must be reasonably calculated not to exceed anticipated expenses and made close to when they are incurred, with any excess returned promptly.

Q: What if an employer wrongly includes accountable reimbursements in box 1?

A: If the employee met all three accountable plan rules, Publication 463 says to ask the employer for a corrected Form W-2 without the reimbursement in box 1.

Q: Can an employer reimburse nondeductible expenses tax-free?

A: No. Reimbursing nondeductible expenses, such as meals when working late at the office, fails the business-connection rule, and that part is treated as paid under a non-accountable plan.

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