What Is Non Accountable Plan?
A non-accountable plan is a type of employee expense reimbursement arrangement where the employer provides an allowance or advance for business expenses without requiring the employee to adequately account for the expenses or return any excess funds. As a component of Employee Expense Reimbursement within the broader field of Taxation, payments made under a non-accountable plan are considered additional Taxable Income to the employee. This means the funds are subject to federal income tax withholding, Social Security, and Medicare taxes, and are reported as wages on the employee's W-2 form34, 35. Unlike an Accountable Plan, which offers tax-free reimbursement for legitimate Business Expenses, a non-accountable plan does not meet the specific criteria set forth by the Internal Revenue Service (IRS)33.
History and Origin
The distinction between accountable and non-accountable plans, and the rules governing employee expense reimbursements, have evolved through IRS regulations and tax law. The Internal Revenue Service (IRS) continually refines its guidance on what constitutes a deductible business expense and how employers must treat reimbursements to ensure fairness and prevent abuse of tax benefits. Key regulations, such as Treasury Regulation 1.62-2, lay out the requirements for an accountable plan32. If these requirements are not met, the plan defaults to non-accountable status. A significant legislative change impacting individual taxpayers' ability to deduct unreimbursed employee expenses was the Tax Cuts and Jobs Act (TCJA) of 2017. This act eliminated itemized deductions for most unreimbursed employee expenses for tax years 2018 through 2025, making the classification of reimbursement plans even more critical for both employers and employees. Prior to the TCJA, employees could potentially deduct certain out-of-pocket work-related expenses as miscellaneous itemized deductions, though these were subject to a 2% of Adjusted Gross Income (AGI) floor.
Key Takeaways
- A non-accountable plan provides employees with an allowance or advance for business expenses without requiring Substantiation or the return of unused funds.
- All payments made under a non-accountable plan are treated as taxable wages to the employee and are subject to income and Payroll Taxes.
- Employers must report amounts paid under a non-accountable plan on the employee's Form W-2.
- This type of plan differs significantly from an accountable plan, which allows for non-taxable reimbursement of legitimate business expenses31.
- Non-accountable plans may offer administrative simplicity but come with greater tax implications for both employees and employers.
Interpreting the Non Accountable Plan
When funds are provided under a non-accountable plan, the interpretation is straightforward from a tax perspective: the entire amount is considered part of the employee's gross income. This means that, unlike reimbursements under an accountable plan, the employee gains no specific tax advantage from these funds being designated for "business expenses". The IRS views these payments as additional wages, irrespective of how the employee actually spends the money. Therefore, employees receiving payments through a non-accountable plan must understand that these funds contribute to their overall Gross Income and will impact their tax liability. For employers, interpreting a non-accountable plan means recognizing the obligation to withhold and remit appropriate taxes, similar to regular salary payments.
Hypothetical Example
Consider Sarah, a marketing consultant, whose employer provides her with a $500 monthly allowance for client entertainment and travel. Her employer does not require her to submit receipts or track her actual spending, nor does she need to return any unspent portion. This arrangement constitutes a non-accountable plan.
Each month, the $500 allowance is added to Sarah's regular paycheck. Even if Sarah only spends $200 on client entertainment and travel, the entire $500 is considered taxable income. Her employer withholds federal income tax, Social Security, and Medicare taxes from the full $500, just as they would from her regular salary. At the end of the year, her W-2 will reflect the $500 monthly allowances as part of her total taxable wages, increasing her overall Income Tax burden. Sarah cannot claim any Tax Deductions for the $200 she actually spent, as the entire allowance was already treated as income.
Practical Applications
Non-accountable plans, while less common for typical business expenses due to their tax implications, can appear in certain scenarios where administrative simplicity is prioritized over tax efficiency. They are primarily relevant in the context of Employee Compensation and benefits. For instance, an employer might provide a flat per diem allowance for travel without requiring receipts, or a general monthly stipend for incidental expenses30. While this simplifies record-keeping for both parties, the trade-off is that these allowances become fully taxable to the employee.
Employers considering a non-accountable plan must weigh the administrative ease against the increased tax burden for their employees and the additional Employer Contributions for payroll taxes. The IRS outlines the specific requirements for an accountable plan in Publication 463, "Travel, Gift, and Car Expenses," which serves as the primary reference for compliant expense reimbursement practices28, 29. Adherence to these guidelines is crucial to avoid having an otherwise accountable plan reclassified as non-accountable upon audit27.
Limitations and Criticisms
The primary limitation of a non-accountable plan is the unfavorable tax treatment for the employee. Since all reimbursements are considered taxable income, employees bear a higher Tax Liability compared to an accountable plan25, 26. This can reduce the net benefit of the reimbursement to the employee and potentially lead to dissatisfaction. From the employer's perspective, non-accountable plans also carry increased costs in the form of higher payroll tax obligations, including Social Security, Medicare, and unemployment taxes24.
Critics argue that non-accountable plans blur the line between legitimate business expense reimbursement and additional wages, effectively shifting the tax burden to the employee for expenses that are, in essence, incurred for the employer's benefit23. The lack of a requirement for Expense Reports and detailed record-keeping also creates a potential for misuse of funds, as employees are not obligated to demonstrate how the money was spent22. While some might view the flexibility as a benefit, the absence of accountability can lead to a lack of oversight regarding actual business-related spending21. As highlighted by IRS guidance, failing to meet the three essential requirements of an accountable plan — business connection, adequate accounting, and return of excess funds — automatically converts a reimbursement scheme into a non-accountable plan, with all its associated tax disadvantages.
#19, 20# Non-Accountable Plan vs. Accountable Plan
The core difference between a non-accountable plan and an Accountable Plan lies in their tax implications and the requirements for substantiation.
| Feature | Non-Accountable Plan | Accountable Plan |
|---|---|---|
| Tax Treatment | Reimbursements or allowances are considered taxable income to the employee. Subject to income tax, Social Security, and Medicare withholding. Included on Form W-2. 17, 18 | Reimbursements for legitimate business expenses are generally non-taxable to the employee. Not subject to income or payroll tax withholding, and not included on Form W-2. 16 |
| Substantiation | No requirement for the employee to provide detailed receipts or a log of expenses to the employer. 15 | Requires the employee to provide adequate accounting (e.g., receipts, dates, business purpose) for all expenses within a reasonable period (typically 60 days). 12, 13, 14 |
| Return of Excess | No requirement for the employee to return any unused portion of the allowance or advance. Employees can keep any savings. 11 | Requires the employee to return any excess reimbursement or advance that is not substantiated within a reasonable period (typically 120 days). 9, 10 |
| Business Connection | While intended for business expenses, the direct connection to specific business activities may not be formally established or verified by the employer. | Expenses must have a clear Business Connection, meaning they were incurred while performing services for the employer. 7, 8 |
| Employer Benefit | Simpler administration; however, employer incurs higher payroll tax costs. | Offers tax savings for both employer (lower payroll tax burden) and employee (non-taxable reimbursement). Requires more administrative effort for verification. 6 |
The choice between these two plans fundamentally impacts the net financial outcome for both parties involved.
FAQs
1. Are non-accountable plan reimbursements always taxed?
Yes, any amounts paid to an employee under a non-accountable plan are considered additional wages and are fully subject to federal income tax, Social Security, and Medicare taxes. They are reported on the employee's Form W-2.
#4, 5## 2. Can an employer have both accountable and non-accountable elements in their reimbursement policy?
Yes, an employer's reimbursement policy can have elements that meet the criteria for an accountable plan for certain expenses, and elements that do not, thus falling under a non-accountable plan for others. It2, 3's crucial for employers to clearly define these distinctions and ensure proper tax treatment for each type of reimbursement.
3. Why would an employer use a non-accountable plan?
While less tax-efficient, a non-accountable plan offers administrative simplicity as it removes the burden of tracking and reviewing detailed expense reports from both the employer and employee. However, this ease comes at the cost of increased tax liability for the employee and higher payroll tax obligations for the employer. Mo1st employers prefer Accountable Reimbursement plans due to the tax advantages for both parties.