Accountable Reimbursement Plan

Q: Why is it important to create an accountable reimbursement plan?

A: An accountable reimbursement plan is a policy adopted by the church board that allows employees to be reimbursed for business expenses. When employees make purchases for the church, they can report these expenses to the church for reimbursement and the reimbursement won't result in taxable income. 

The accountable reimbursement plan, in order to meet IRS specifications, ought to have the following qualities:

1. There must be a business connection of the expenses reimbursed.
2. The employee must make an adequate accounting of the expenses (according to IRS standards) within a reasonable period of time.
3. Any excess reimbursements or advances must be returned to the church employer and may not be retained by the employee.
4. Reimbursements may not be made out of salary reductions – this means that reimbursements may not reduce the employee’s taxable wages.

If these standards are not followed, but the church reimburses the employee, the church has engaged in a non-accountable reimbursement plan. Non-accountable reimbursements are considered taxable income and must be accumulated on the employee’s W-2 at yearend.

There are several advantages of having an accountable reimbursement plan versus a nonaccountable reimbursement plan. Expenses that are reimbursed via an accountable reimbursement plan are treated favorably for tax purposes for three reasons:

• First, these reimbursements are not counted as taxable income to the employee. Expenses reimbursed under non-accountable plans, by contrast, are counted as income to the employee.
• Second, unreimbursed employee business expenses are no longer deductible on Schedule A of the individual’s tax return.
• Third, when unreimbursed expenses for an employee (who is a minister with a housing allowance) are claimed as business expenses on an individual’s tax return, these expenses are reduced by the application of the Deason Rule. 

Additional Information:

To dig into IRS rules about accountable reimbursement plans, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.