The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Texas is representative of a common inquiry related to what items constitute wages for plan purposes.The advisor asked:
“Are reimbursements that an employee receives from his or her employer for business expenses counted as income or wages on Form W-2?”
Highlights of the Discussion
Generally, reimbursements that an employee receives from his or her employer for business expenses count as pay or income on Form W-2 (box 1) only if the reimbursements are treated as paid under a “nonaccountable plan” as apposed to an “accountable plan” [see IRS Publication 15 (Circular E) and Publication 463, Travel, Gift and Car Expenses]. Conversely, reimbursements paid from an accountable plan are not treated as employee pay or income, and are not reported on Form W-2. An employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan.
Accountable Plan
To be an accountable plan, an employer's reimbursement or allowance arrangement must satisfy all of the following rules.
- employee expenses must have a business connection; meaning, an employee must have paid or incurred deductible expenses while performing services as an employee of the employer;
- an employee must adequately account to his or her employer for these expenses within a reasonable period of time; and
- an employee must return any excess reimbursement or allowance within a reasonable period of time.
Nonaccountable Plan
A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three criteria listed above. Be aware, however, that even if an employer has an accountable plan (as described above), the IRS will treat the following payments as being paid under a nonaccountable plan:
- excess reimbursements an employee fails to return to the employer; and
- reimbursement of nondeductible expenses related to the employer's business.
Conclusion
Whether reimbursements to an employee for business expenses count as pay or income for the recipient depends on whether the employer pays such amounts from an accountable or a nonaccountable plan.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
