Updated: Jun 19
Do I need an Accountable Plan?
As a business owner or manager, you may have heard of the term "accountable plan" when discussing employee reimbursements or expense payments. However, you might not be completely sure what it entails or whether it is necessary for your organization. An accountable plan is not required by law, but it can bring significant tax benefits for both employers and employees, making it a valuable consideration for any organization.
What does an Accountable Plan do?
An accountable plan is a formal, IRS-approved reimbursement arrangement between an employer and its employees. It enables employees to receive reimbursements or advances for business expenses without incurring additional tax liabilities. The main function of an accountable plan is to provide a framework for expense payments that ensures compliance with IRS regulations and helps employers avoid tax complications.
To qualify as an accountable plan, the arrangement must meet three primary criteria:
Business Connection: Reimbursements or allowances must be provided exclusively for business expenses incurred by the employee in connection with their work. Personal expenses are not eligible for reimbursement under an accountable plan.
Substantiation: Employees must provide adequate documentation (e.g., receipts, invoices, mileage logs) to substantiate their expenses within a reasonable period, typically 60 days after the expense was incurred.
Return of Excess: If an employee receives an advance or allowance that exceeds their substantiated expenses, they must return the excess amount to the employer within a reasonable period, usually 120 days.
By implementing an accountable plan, businesses can ensure that reimbursements and allowances provided to employees are treated as tax-free and excluded from their wages. This means that employees will not have to report these payments as income on their tax returns, nor will they be subject to payroll taxes. Likewise, employers can benefit from lower payroll tax obligations and the ability to deduct employee business expenses as a business expense on their own tax returns.
Where can I get an Accountable Plan?
Creating an accountable plan is a straightforward process, but it is essential to ensure that the plan meets all IRS requirements. To establish an accountable plan, follow these steps:
Draft a written policy: Start by creating a document outlining the terms and conditions of the plan, including the types of expenses covered, substantiation requirements, and deadlines for submission and return of excess payments.
Obtain approval from stakeholders: Share the drafted policy with key stakeholders, such as management, human resources, and legal teams, for review and approval.
Implement the plan: Once approved, incorporate the accountable plan into your company's policies and procedures. Communicate the new policy to your employees and provide training on how to properly submit expenses and documentation.
Monitor and enforce compliance: Regularly review expense reports and documentation to ensure that employees are adhering to the accountable plan's requirements. Provide ongoing support and training to address any questions or concerns.
Maintain documentation: Keep detailed records of all reimbursements and expense reports in case of an IRS audit. Proper record-keeping is crucial for demonstrating compliance with accountable plan rules.
While creating an accountable plan might seem daunting, consulting a tax professional or legal advisor can help ensure that your plan meets IRS requirements and provides the maximum tax benefits for your organization. A CPA can help you create your accountable plan properly.
In summary, an accountable plan is a valuable tool for organizations seeking to optimize their tax benefits while providing reimbursements or allowances to employees for business expenses. By meeting the IRS requirements for business connection, substantiation, and return of excess, employers and employees can enjoy tax-free reimbursements and expense payments. Although not legally required, an accountable plan can lead to significant savings for both parties and streamline expense management processes. To establish an accountable plan, draft a written policy, obtain stakeholder approval, implement the plan, and monitor compliance while maintaining thorough documentation. For additional guidance schedule a free consultation with a CPA at Iota Finance to ensure your plan meets all IRS criteria and maximizes tax benefits for your organization. By implementing an accountable plan, your business can efficiently manage employee expenses and foster a culture of fiscal responsibility and transparency.