Compliance with IRS Accountable Plan Requirements for Reimbursements
According to Internal Revenue Service (IRS) regulations, reimbursements for ordinary and necessary (not lavish or extravagant) business expenses are reimbursed “tax free” to an employee, but only when paid under an “IRS Accountable Plan.” To demonstrate compliance with this requirement, the University operates an IRS Accountable Plan as specified below. Accountable Plans are addressed in IRS Publication 463, “Travel, Entertainment, Gift and Car Expenses.”
3 Requirements to meet an IRS Accountable Plan (all 3 must be met):
1) All expenses to be reimbursed must have a clear business connection.
- An expense must have been incurred while performing services as an employee or student of the University, and must directly benefit the University.
- Expense amounts must be ordinary and necessary, not lavish and/or extravagant.
2) An “Adequate Accounting” must be provided within a “Reasonable Period of Time” (60 days).
- Adequate Accounting – A complete record includes all receipts, invoices, memos, mileage logs, conference agendas, etc, showing the exact amount, date, time, place, as well as a written business purpose demonstrating how the University benefits from the transaction. The determination as to whether the accounting is adequate is determined by the appropriate Financial Service Core approval office(s) Unrestricted Accounting or Contract & Grant Accounting as part of their standard review process for reimbursement requests.
- Reasonable Time Period
- While the IRS doesn’t specifically define the exact timeframe to meet the “Reasonable Time Period” requirement, IRS Publication 463 states that 60 days is deemed acceptable for a reimbursement. Therefore, the University defines the “Reasonable Time Period” for reimbursements in our Accountable Plan as 60 days.
- For purposes of the University’s Accountable Plan, the “Reasonable Time Period” is measured based on the submit date of the reimbursement report in Chrome River. Reports submitted within 60 days of end of travel or receipt date for non-travel will have met the “Reasonable Time Period” requirement. In rare cases where an employee provides full accounting for reimbursement to their department/unit within 60 days, but the submission of the corresponding reimbursement report was delayed beyond 60 days through no fault of the employee (such as by administrative delay due to short staffing at the unit level), the report will be deemed to have met the “Reasonable Time Period” requirement.
3) Any excess reimbursement or allowance must be returned within 120 days after the expense was paid or incurred.
- This generally will not apply, as the University does not issue advances or travel advances, and should not be issuing excess reimbursements.
Although the University has a documented accountable plan, per IRS regulations, any and all reimbursements that do not meet ALL THREE rules noted above are considered as being reimbursed under a “Non-Accountable Plan.” In the case of transactions reimbursed under a Non-Accountable Plan (where all Accountable Plan rules are not met), the University must include in box 1 of an employee’s W-2 as additional “wages salary or other compensation” all expenses reimbursed. In addition, the employee must have appropriate taxes withheld on this additional compensation, and the University will also incur and must pay the applicable employer payroll taxes. Due to this additional burden on both the employee and the University, it is critical that that reimbursement requests be submitted completely and timely, and in accordance with both UNM policy, and the IRS accountable plan rules.
FAQs
Why does the University operate an IRS Accountable Plan?
The IRS provides the University two options with respect to reimbursing our employees:
- Option 1 - All reimbursements are taxable to the employee (extremely undesirable option).
- Option 2 - All Employee reimbursements are non-taxable to the employee, provided the University follows an IRS Accountable Plan.
By operating an IRS Accountable Plan, the University may reimburse our employees without having to tax the employee on the amount of the transaction. This reduces taxes paid for both our employees and the University.
I did not submit my reimbursement within 60 days. Can the University grant exceptions to IRS Accountable Plan rules?
No exceptions cannot be granted to IRS Accountable Plan rules, as these rules constitute Federal Tax law. No University employee has the power to grant an exception to a Federal law.
What happens if the University does not consistently apply IRS Accountable Plan rules to employee reimbursements?
If the University was to grant exceptions and not consistently follow Accountable Plan rules, the IRS could disallow the University’s Accountable Plan. If that were to happen, the University would be forced to treat all reimbursements as paid under a “Non-Accountable Plan.” Under those circumstances, all reimbursements would be considered taxable income to our employees and would be reported as additional compensation on the employee’s W-2 tax form.
Additional Accountable Plan & reimbursement guidelines can be found in the following University Administrative Policies:
