The ROBS 401k webinar this week mentioned an “Accountable Plan” for expense reimbursements. It’s an important – and simple – document to create. It establishes your company’s expense reimbursement policy and ensures you are compliant with US Treasury and IRS regulations, specifically Regulation 1.62-2. Having an Accountable Plan means that reimbursements are excluded from gross income, are exempt from withholding & employment taxes, and aren’t reported as wages or compensation on the employee’s W-2. For small businesses, this document can be 1 to 2 pages in length. There are a number of examples available simply by searching “accountable plan template”. Intuit has a sample 1-page plan that my accountant suggested, although I used this and several other examples to draft my plan, which is 2 pages.
The requirements are fairly simple – the expense must have a business connection, be substantiated, be submitted within a reasonable time, and any excess returned within a reasonable time. The regulation specifies fixed date “Safe Harbor” time limits – within 60 days after an expense in incurred for substantiation and 120 days to return excess payments. The plan document outlines these requirements. It also identifies any exceptions to the plan, if any.
To help demonstrate compliance, you should have an expense reimbursement form to document expenses. I use an Excel spreadsheet that I modified from the expense report form I used at my previous employer. Each day is a separate row. It has columns for reason for expense and typical expense categories, a separate area for mileage, and signature blocks for employee submitting and employer approval. Since my wife works in the business, I have her sign as the approver for my expenses and I sign as the approver for her expenses. We attach receipts to the approved expense report (we also scan everything for quick retrieval).
Creating an Accountable Plan for your ROBS 401k business takes less than an hour and keeps you from having to include expense reimbursements in your taxable compensation.