Employer Expense Reimbursement Plan (Arrangements) · • Timing of reimbursement reporting Employer should also employ some type of internal compliance to ensure all employee reimbursements

Employer Expense Reimbursement Plan

(Arrangements)

Presented by:Carolyn Quill & Suzanne Juba

© 2018 Thompson Greenspon

THOMPSON GREENSPON | CPAS & ADVISORS | PARTNERING FOR SUCCESS

PRESENTERS

© 2018 Thompson Greenspon

Carolyn C. Quill, CPA, JD, LL.M. Suzanne Juba, CPAPrincipal Supervisor

PresenterPresentation Notes

Moderator/Webinar master should welcome everyone, explain how things will work for CPE and introduce speakers.


WHAT MAKES AN EMPLOYER EXPENSE REIMBURSEMENT ARRANGEMENT MORE PREVELANT NOW?

• Under the new tax law enacted as part of the Tax Cuts and Jobs Act, as of 01/01/2018, an employee will no longer be able to deduct unreimbursed employee business expenses on their individual tax returns as miscellaneous itemized deductions.

• Employer can help mitigate the employee’s loss of the unreimbursed business expense deduction by having an accountable reimbursement plan in place as opposed to a non-accountable plan.

3© 2018 Thompson Greenspon


ACCOUNTABLE VS. NON-ACCOUNTABLE PLAN


Accountable Reimbursement Plan (ARP)

Non-Accountable Plan

An employee reimbursement or otherexpense allowance arrangement that requires employees to prove a business connection, substantiate expenses, and return unsubstantiated amounts. Payments under such a plan are:

An employee reimbursement or other expense allowance arrangement that does not meet the requirements of an “accountable plan”.

Payments under such a plan are:

• Deductible by the employer as business expenses

• Deductible by the employer as employee compensation

• Excluded from the employee’s gross income

• Included in the employee’s gross income

• Exempt from withholding and employment taxes

• Reported on the employee’s form W-2

• Subject to income tax withholding and employment taxes

IRS Treasury Regulation 1.62-2(c)(2) IRS Treasury Regulation 1.62-2(c)(3)


KEY ELEMENTS OF ESTABLISHING AN ARP

Requirements:

Amounts are treated as paid under an accountable plan if they are paid under a reimbursement or other expense allowance arrangement that meets the following:

A business connection requirement; AND A substantiation requirement; AND A requirement that amounts received in excess of

expenses be returned


PresenterPresentation NotesRequirements:Amounts are treated as paid under an accountable plan if they are paid under a reimbursement or other expense allowance arrangement that meets the following:A business connection requirement: which requires the advances, allowances, or reimbursements to be for only specified deductible expenses that are paid or incurred by the employee in connection with his services as an employee; andA substantiation requirement: which requires the employee to substantiate each business expense to the payor under the rules for Code Sec. 274(d) expenses, or for other deductible business expenses, whichever are applicable; and A requirement that amounts received in excess of expenses be returned, which requires that the employee return to the payor, within a reasonable time, any amount paid under the arrangement in excess of the expenses substantiated. If excess is not returned, then the allowance is no longer provided under accountable plan and will be required to be included in the employee’s wages for the year.


KEY ELEMENTS OF ESTABLISHING AN ARP

Written Policy/Document:

Once the above are met, the employer should adopt a clear and concise written accountable plan document or policy statement that clearly spells out the details of the plan and the conditions imposed on expense reimbursement and allowances:

• Expenses that will be reimbursed• Method on how to be reimbursed • Specific documentation required• Timing of reimbursement reporting

Employer should also employ some type of internal compliance to ensure all employee reimbursements are adequately received and records maintained.


PresenterPresentation NotesWritten Policy/Document:

Once the above are met, the employer should adopt a clear and concise written accountable plan document or policy statement that clearly spells out the details of the plan and the conditions imposed on expense reimbursement and allowances:

Expenses that will be reimbursed: for example travel, lodging, meal, mileage, and marketing costs incurred while conducting business activity;Method on how to be reimbursed: expense report-detailing the necessary information to be provided: Date of the expense, business reason for the expense, and amount;Specific documentation required: Copies of logs, receipts, etc.Timing of reimbursement reporting

Employer should also employ some type of internal compliance to ensure all employee reimbursements are adequately received and records maintained.


REASONABLE PERIOD OF TIME FOR REPORTING

How often does the substantiation have to occur? Monthly? Yearly? Doesn’t matter?

The IRS states that “reasonable period of time” depends on the facts and circumstances of the situation.


Fixed Date Method Periodic Statement MethodYou receive an advance within 30 days of time you have an expense

You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.

You adequately account for your expenses within 60 days after they were paid or incurredYou return any excess reimbursement within 120 days after the expense was paid or incurred

PresenterPresentation NotesHow often does the substantiation have to occur? Monthly? Yearly? Doesn’t matter?

Substantiation is required to be provided within a reasonable period of time (IRS Treasury Regulation 1.62-2(g)). The IRS states that “reasonable period of time” depends on the facts and circumstances of the situation. However, the IRS allows two optional safe harbor procedures: the fixed date method and the periodic statement method, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time: Fixed Date Method:You receive an advance within 30 days of the time you have an expense.You adequately account for your expenses within 60 days after they were paid or incurred.You return any excess reimbursement within 120 days after the expense was paid or incurred.Periodic Statement Method:You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.


WHAT IF AN EMPLOYEE DOES NOT FOLLOW THE PLAN REQUIREMENTS?

The requirements for an accountable plan generally apply on an employee-by-employee basis. Thus, the failure by one employee to meet the requirements will not disqualify reimbursements or allowances for other employees from accountable plan treatment. (Nor will other reimbursements to the same employee that meet the accountable plan requirements necessarily be tainted.) This is called the “automatic” plan-splitting rule. Therefore, if one employee fails to substantiate an advance provided within the reporting time or return the excess, the amount of the unsubstantiated advance will be reported to the employee under the non-accountable plan rules. Amount will be added to the employee’s wages and subjected to payroll and withholding taxes.



USE OF PER DIEM TRAVEL ALLOWANCE

Per Diem allowance is also an allowable plan reimbursement under an ARP as long as it meets all of the requirements of an accountable plan as stated above. But, per diem reimbursements are only allowed for ordinary and necessary business expenses incurred by an employee for either lodging, meal, and incidental expenses, or for meal and incidental expenses for travel away from home.

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USE OF PER DIEM TRAVEL ALLOWANCE (CONT.)

If an employer chooses to utilize per diem method the following is required:• Per diem allowances paid from the accountable plan

are not subject to FICA, FUTA, or federal income tax withholding

• Since per diem rates are used, employees only have to account for time, place, and business purpose of travel and will be reimbursed based on the employers per diem rate stated in the plan

• Under the per diem allowance method, the amount that is deemed substantiated is equal to the lesser of the actual per diem rate established by an employer for locality or the amount computed under the federal per diem rate for the locality of travel for the period the employee is away from home

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USE OF PER DIEM TRAVEL ALLOWANCE (CONT.)

• The federal per diem rate is equal to the federal lodging expense rate plus the federal meals and incidental expense rate for the locality of travel

• If the employers per diem rate exceeds the federal per diem rate, the employee must substantiate expenses in excess of the federal rate or the unsubstantiated income will be treated as income

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TAX TREATMENT

If the employer’s plan meets the requirements of an ARP, and the employee follows the rules of the plan, then the reimbursements and/or allowances received by the employee will not be included in the employee’s wages and the employer expenses the reimbursements as ordinary business expenses.

But, if reimbursement payments are made under a non-accountable plan, the amounts are included in the employee’s wages, subject to payroll taxes: Social Security, Medicare, and withholding, and the employer receives a deduction for wages paid.

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WITHHOLDING & REPORTING EMPLOYEE EXPENSE REIMBURSEMENT CHART

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Type of Reimbursement Withholding & Paymentof Employment Taxes Form W-2 Treatment

Overall Accountable Plan

1. Adequate substantiation and return of any excess advance

Not Required No W-2 Reporting

2. No substantiation No later than 1st payroll period following end of reasonable period

Taxable wages [boxes 1, 3 (subject to the max SS wage base), & 5]

3. Partial substantiation and return of excess (unsubstantiated) amount

Not Required No W-2 Reporting

4. Partial substantiation and no return of excess amount

a. Amount substantiated Not Required No W-2 Reporting

b. Unreturned excess advance No later than 1st payroll period following end of reasonable period

Taxable wages [boxes 1, 3 (subject to the max SS wage base), & 5]


WITHHOLDING & REPORTING EMPLOYEE EXPENSE REIMBURSEMENT CHART (cont)

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Type of Reimbursement Withholding & Paymentof Employment Taxes Form W-2 Treatment

5. Advance or reimbursement of nondeductible business expenses

Generally when paid Taxable wages [boxes 1, 3 (subject to the max SS wage base), & 5]

6. Advance or reimbursement of nonbusiness expenses

When paid Taxable wages [boxes 1, 3 (subject to the max SS wage base), & 5]

Overall Nonaccountable Plan When paid Taxable wages [boxes 1, 3 (subject to the max SS wage base), & 5]


ADDITIONAL ITEMS TO NOTE WHEN ESTABLISHING AN ARP

• Employer can have separate non-accountable reimbursement plans. This can be useful where the employer reimburses nonbusiness expenses or knows and employee will not comply with the accountable plan requirements for certain types of expenses.

• The employer does not want to utilize an ARP as a form of disguised salary or salary reduction. For example: If an employer arranges to pay an amount to an employee regardless of whether the employee incurs (or is reasonably expected to incur) business expenses stated in the plan, the arrangement does not satisfy the requirements of an ARP and all amounts paid under the arrangement are treated as paid under a nonaccountable plan, to all employees.

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PresenterPresentation NotesOverall the employer should ensure the employees understand their reporting requirement to ensure they benefit from the plan and the employer receives an ordinary expense deduction instead of a compensation deduction which is subject to payroll taxes.

Documents

Employer Expense Reimbursement Plan (Arrangements) · • Timing of reimbursement reporting Employer should also employ some type of internal compliance to ensure all employee reimbursements