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​Reimbursements Under Accountable Plans | Tax Publications

By: Ariana N. Warren, CPA, Tax Senior at Raffa, P.C.

In the non-profit world, its commonplace for Board members and top Executives to travel on behalf of the organization and to be reimbursed for these expenses. However, before these reimbursements are made, it is imperative for the non-profit to recognize the difference between accountable and non-accountable plans. The differentiation between these two plans impacts taxable income for the individual. In IRS Publication 535, the IRS provides guidance on the reimbursement of travel, meals, entertainment, and accountable plans.

Distinctions

An accountable plan requires:

  1. the person must have paid or incurred such expenses while performing services for the organization;
  2. the employee must adequately report these expenses to the non-profit within a reasonable time period; and
  3. any excess reimbursement must be returned to the non-profit within a reasonable time period.

Adequate accounting requires substantiation by receipts or other documentary evidence. A reasonable time period is within 60 days after the expenses are incurred.

If reimbursements are made under an accountable plan, these funds are excluded from taxable income and therefore excluded from reporting on IRS Form W-2. Excess payments, that is, the amounts paid above the documented expenses, are required to be reported on Form W-2, in Box 1 as taxable wages. All reimbursements under a non-accountable are required to be reported in Form W-2, Box 1, and are taxable to the recipient. A non-profit will also want to be mindful that Form W-2 and Form 1099 wages paid to Board members are reportable on the federal Form 990, Annual Filing for Exempt Organizations. This reporting is not subject to a threshold, and non-profits should be mindful that payments to Board members that exceed $10,000 may cause the member to be considered as not independent for reporting purposes. Consider the following examples:

Example A: A Board member travels to Florida to give a presentation on sewage waste and its environmental impact on behalf of the organization. Before he travels, he is given $500 for his flight. When he returns home, he provides the organization with receipts that reflect $350 incurred for the flight. He does not return the $150 excess to the organization. Accordingly, this amount becomes reportable in Form W-2, box 1. Note that while this is not an accountable plan, he has provided adequate support for the expenses to the organization. This fails to meet the requirements to be an accountable plan, as it did not meet the third criterion of such plans. Further, the Board member created taxable income by failing to return the excess to the organization.

Example B: Same fact pattern as example A, except the board member returns the $150 excess to the organization within 60 days. No taxable income is generated to him. This is an accountable plan as it meets all three requirements of the IRS criteria to be deemed as such.

Example C: Same fact pattern as example A, except the board member does not produce any receipts upon his return. The entire amount of $500 is reported as taxable income on Form W-2, Box 1 as this falls under a non-accountable plan. This transaction lacks adequate reporting to the organization.

Non-profits will also want to make sure they are complying with the rebuttable presumption of reasonableness (RPR) and are providing only a reasonable amount of compensation. A line of questioning related to the rebuttable presumption of reasonableness appears directly on the federal Form 990, and can raise red flags to the IRS if compensation was not determined on a reasonable basis or justified by external information. Non-profits should be certain compensation is derived by 1) a review of independent persons, 2) the use of comparable data, and 3) is contemporaneously documented at the time of the decision. Meeting all three of these requirements will allow the organization to meet the RPR prima fascia. 

Finally, amounts paid to a disqualified person under a non-accountable plan that are not included in compensation will likely be deemed an automatic excess benefit transactions by the IRS, regardless if the amounts reimbursed are reasonable.

Conclusion

It is always better to take a more deliberate approach for expense reimbursement by following the accountable plan rules. Doing so improves transparency and minimizes risk to the employee regarding the nature of their compensation. When the non-profit does the work up-front to maintain proper documentation, Board members, your auditors, and most importantly the IRS, will thank you profusely.

If you have any questions, please contact Frank Smith, Partner, at fsmith@raffa.com or 202-955-6735 or Ariana N. Warren, Tax Senior, at awarren@raffa.com or 202-955-5418, members of Raffa's Nonprofit Tax Practice.

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