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Tips for a Valid Accountable Plan

Principals of good financial management call for having a valid accountable plan for employee expense reimbursements for all businesses or organizations, whether for-profit or not-for-profit. The IRS lists three rules for a reimbursement or allowance arrangement which all must be met in order for the plan to qualify as an accountable plan. They can be summarized as follows:

  1. Expenses must have a business connection;
  2. Expenses must be adequately accounted for within a reasonable period of time; and
  3. Any excess reimbursement or allowance must be returned within a reasonable period of time.

These rules make sense and should be applied in any case to assure that employee expense reimbursements are for verifiable, legitimate business purposes. The challenges of running a not-for-profit organization make them even more necessary. Without clear policies and procedures in place, your organization could come under scrutiny from the board of directors, donors or other oversight agencies for irregular or unsubstantiated expenditures. Although we do not like to think about it, the potential for fuzzy or even fraudulent expenditures must be avoided to prevent costly and damaging abuses. And per the IRS, if the criteria for an accountable plan are not met, reimbursements to employees would have to be reported as taxable earnings on their form W-2.

To protect your organization and to be in compliance with the IRS, here a few tips for a valid accountable plan:

Have a Real Plan
While an accountable plan is not required to be in writing, a formally established plan makes it easier for your organization to prove its validity to the IRS if ever challenged. A written plan also can provide guidelines and requirements for expense reimbursements, making it easier for employees to understand and comply, and for management to enforce.

Make Sure the Expense is Reasonable
According to the IRS, expenses that are reimbursable under an accountable plan should be “ordinary,” meaning common and accepted in your trade or business and “necessary,” defined as helpful and appropriate. Not-for-profit organizations, especially smaller ones, may need to specify limits as to what may be spent on discretionary expenses such as entertainment and travel. Some contributors may not appreciate knowing that their unrestricted contribution was used to pay for a trip to a luxury resort for staff and spouses. But an organization hosting a Nobel Laureate would not expect an honored guest to stay at a cheap motel either. Anticipated expenses should have been included in the budget, and reimbursement requests should be reviewed and approved by a supervisor.

Account Adequately for the Expenses
The IRS requires that these records are kept for business expenses that are reimbursed:

  • The amount of the expense and the date;
  • The place of the travel, meal or transportation;
  • The business purpose of the expense; and
  • The business relationship of the people entertained or fed.

Reimbursements should not be processed without supporting documentation. Actual receipts for expenses including transportation, meals, lodging and other incidentals should be submitted with the reimbursement request unless your organization uses a per diem plan in lieu of direct reimbursement. Credit card statements may be used to provide key elements of the documentation, such as the place and date of the expense but employees must supplement the statement with documentation of other elements and additional information.

Additionally, employees should be given a time frame or deadline to request reimbursement and submit proper documentation.  IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, provides guidelines for what could be considered reasonable amounts of time. For further information regarding per diems rates, see IRS Publication 1542, Per Diem Rates, which includes the IRS per day amounts for combined meal and lodging expenses. When using a per diem for travel — or mileage for vehicle usage — an employer may adopt a lower amount than the IRS maximum.

Keep Track of Mileage
A travel log, diary or similar record may be used to substantiate a vehicle’s business use. Printing directions from a computer map application can provide a fairly accurate total of the miles traveled. For 2015, mileage can be reimbursed up to 57.5 cents for every mile driven in personal vehicles for business purposes (56 cents per mile in 2014).

Reimburse Correctly
Obviously, the amount spent is the amount that should be reimbursed. If advances have been given, a full accounting of how the funds were spent must be submitted. If the total advance was not spent or cannot be accounted for, the excess should be returned to the organization – otherwise, that amount is considered taxable earnings to the employee and must be reported on their Form W-2 as compensation. Alternatively, an employee’s compensation should not be reduced by the amount of reimbursements for qualified expenses.

Complying with the IRS guidelines is essential, but it is also in an organization’s best interest to provide timely and accurate reimbursement of employee business expenses from accurate and complete records. Employees should be discouraged from using personal funds for business expenses to the extent possible. Cash poor organizations sometimes rely on individual employees to use their own money to fill in funding gaps. This can cause strain over time, which can lead to bad habits.  For example,  an employee who feels taken advantage of may resort to reimbursing themselves in a very unqualified fashion. An organization’s funds should never be used for anything remotely resembling personal expenses. Extreme care and meticulous recordkeeping is a must if combining business trips with personal vacations. With common sense, basic oversight and control, your organization can conform to IRS guidelines and protect your hard earned funds for your charitable purposes.

For questions, contact Margaret Swain at 312.670.7444. Visit to learn more about our Not-For-Profit Group.

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