Reimbursement scenarios should not resemble wages In instances where employees are required to routinely provide their own tools and materials. As an example if a plumber is required to provide his or her own supplies and is paid $200 per day, an employer cannot simply designate $50 of the janitor’s pay as reimbursed cleaning supply expense. If the employee would receive the same amount of compensation anyway, the business connection requirement is not met. Reimbursements must have a clear correlation to actual expenses.
Proving telephone and internet expenses can test practical limits as well. Telephone expenses reimbursed under an accountable plan must be for telephone calls made with a business connection. This means substantiating the reimbursement amount with actual billing statements, with business calls noted and an offset for the cost that the employee would have paid. This level of paperwork can be daunting. While these expenses can be reimbursed under an accountable plan, consider a set dollar reimbursement instead, which can be accomplished by treating the expense as a working-condition fringe benefit under Sec. 132(a)(3) (see also Notice 2011-72 and IRS Small Business/Self-Employed field memo SBSE-04-0911-083).
Accountable plans can be structured to provide advances or allowances that are substantiated after the fact. Detailed expense reports help to distinguish accountable plan reimbursements from nonaccountable plan allowances. For instance, a car allowance with no requirement to account for mileage, dates, and destinations should be fully reported on the employee’s Form W-2, Wage and Tax Statement, as wages, even if the employee incurs substantial business mileage.
Accountable plans are not employee benefit plans and do not have to follow the nondiscrimination rules applicable to employee benefit plans. A business can reimburse an owner, but not other employees, for a home office, for example. An employer can have different arrangements with different employees, and if one employee fails to comply with the plan requirements, only that employee will be affected. Consistency for scalability is critical but flexibility does exist.
