Accountable Reimbursement Plan

Accountable reimbursement plans are a valuable resource for most churches and nonprofits. Most experts recommend even the smallest churches set up an expense reimbursement policy for their pastor and staff to use.

Accountable reimbursement plans

An accountable reimbursement plan is an employee reimbursement arrangement or method for reimbursing employees for legitimate business expenses.

If set up correctly, reimbursed business expenses do not have to be treated as taxable income.

See this page for instructions on setting up and administering an accountable reimbursement plan.

However, an expense reimbursement policy could turn into a nightmare for a church and their minister and/or staff if not done properly.

If a minister or church is audited and there is not proper supporting documents backing up the reimbursement claims, the reimbursements could be considered income for the minister or staff member. They would then owe penalties for not claiming the income…and it snowballs from there.

Adopting Appropriate Policies:

Before reimbursing your employees, your church or nonprofit organization should ensure all of their tax-exempt funds are being properly expended by adopting appropriate policies such as the following:

  • Accountable Reimbursement Policy
  • Credit Card Policies and Procedures
  • Travel Reimbursement Policy

See some tips on creating these policies on this page: Creating an Accounting Policy Manual. There are also some free sample policies available for downloads on that page. 

Accountable Reimbursement Plan Guidelines:

This How To Book for Churches is packed full of tips for: 

  • setting up internal controls,
  • setting up an effective fund accounting system,
  • handling and tracking contributions,
  • setting up compensations for a minister,
  • handling a payroll for a church
  • preparing nonprofit financial statements,
  • and much more.

Read more!

There are 3 requirements for an effective and "legal" accountable reimbursement plan.

They are:

  • Must have a legitimate business purpose for every reimbursement
  • Must require employees to substantiate expenses
  • Must require employees to return any excess reimbursements

The last 2 components must be handled within a "reasonable time".

According to IRS Pub 463, the definition of "reasonable time" "depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time".

The following methods meet the "reasonable time" requirements:

The fixed date method applies if:

  • an advance is made within 30 days of when an expense is incurred or paid.
  • proper expenses are adequately substantiated within 60 days after they were incurred or paid.
  • any excess reimbursement is returned to employer within 120 days after the expense was incurred or paid.

The periodic statement method applies if:

  • a periodic statement are issued (at least quarterly) by the employer that requests employees to either return or adequately account for outstanding advances and that they must comply within 120 days of receiving the statement.

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Accountable Reimbursement Tips:

  • Get supporting documents such as receipts and mileage logs!
  • Properly file them!
  • Appoint someone to be in charge of administrating the accountable reimbursement plan.

Make sure they know what an appropriate business expense is and what is not and the time limit for obtaining the supporting documents.

The IRS requires the employer to keep good accounting records. Every reimbursed expense must include the following information (the 4Ws):

  • Who was reimbursed and if for a business meal...whom were they with....and where were they?
  • When were they reimbursed?
  • What were they reimbursed for and ... for how much did it cost?
  • Why were they reimbursed (was it a legitimate “business” expense)?

Mileage Dos and Do Nots:

  • Do Not reimburse your minister for travel back and forth from his home to the church (it is considered commuting miles)
  • Do reimburse them for trips to hospitals, nursing homes, member’s homes, etc.
  • Do Not fill up a staff's gas tank for church business. The IRS frowns on this practice. Their view is that if you fill up their personal vehicle's gas tank than they will have to prove that they used every drop of that gas for church business or they want the value of the personal miles on that tank of gas added to their income...nit picking I know...but it is the IRS and they are famous for it:)
  • Do use a mileage reimbursement form. A better way to handle reimbursing staff for using their own vehicle for church business is for them to use a mileage log and/or a mileage reimbursement form like the one in my Spreadsheet Package  and turn in to the church for reimbursement at the mileage rate stated in your policy.
Accountable Reimbursement Plan Tips

Do Not ...

...give the left over funds in your accountable reimbursement plan to any staff person including the minister at the end of the year. It would null and void your whole policy and you would have to include all reimbursements for the year on a W-2 as income.

Last but still very important...include wording in your accountable reimbursement arrangement that would allow your minister/staff to claim unreimbursed expenses on their personal taxes IF the church could not afford to reimburse those expenses.  

I read an article on StartChurch many years ago on this very issue. Even though this article was written back in 2012...it still applies to accountable reimbursement policies today. (The link to that article is located at the bottom of this page.)

The article stated that in a recent court case, Stidham, T.C. Summ. Op. 2012-61, the court ruled that a taxpayer is not entitled to take a tax deduction for unreimbursed businesses expenses if the employer has a reimbursement policy.

This ruling may impact small churches that are not always able to afford all reimbursements. The author pointed out that churches may need to amend their accountable reimbursement policies to include wording that would require the church to send a written reply to the requesting employee recognizing their claim as legitimate but also denying it according to its reimbursement policy on the basis that it cannot afford to issue the reimbursement.

Church Accounting Package

The ebook: Church Accounting Made Easy includes a bonus section on accountable reimbursement plans. It includes:

  • How to set up and administer
  • Examples of supporting documents
  • Example of resolution
  • Reimbursement Tips
  • read more

Reference:

Dan Busby's Church and Nonprofit Guide

Richard Hammar's Church and Clergy Tax Guide

Raul Rivera's Auditing Reimbursements; An Easy Win For the IRS


Accountable Reimbursements

Do you have a question or comment regarding accountable reimbursement plans? Share it!

Archive of Accountable Reimbursement Plan Readers Comments

The following comments, tips, and Q/A were provided by FreeChurchAccounting's generous readers:

Housing Allowance 
Our Pastor had to sign up for A.C.A. (Affordable Care Act) at the beginning of this year. Is there an issue for the Church to increase the Pastor's …

Accountable Reimbursement Plan 
Can this type of plan be set up for a volunteer in the church? Say the Pastors wife?

Mileage/housing allowance 
We have two associate pastor's that we are paying $300 a week for mileage. They were paid $1,500...we only began this 5 months ago. I was instructed …

No Funds for Pastor's Expense Reimbursements 
How to write a statement or resolution when church has no funds to reimburse Pastor's expenses? I search you site and found nothing addressing the issue. …

Gas Allowance 
Our church has a charge account at one of the local gas stations. Pastor and staff is able to charge gas and the church is billed monthly for the gas purchases. …

Automobile Mileage 
My church pays a mileage allowance at the federal standard rate for the pastor's automobile. It is a part of an accountable reimbursement plan for the …

Reimbursement for International Travel Not rated yet
Can the ministry reimburse a minister based on fixed per diem rates for lodging, meals, and incidentals rather than on actual costs when traveling? …

IRS Accountable-Nonacountable method Not rated yet
Read this exspecially the part about excess amount over subsantiate...IRS Pub 15 (cir E) and Pub 535: To be an accountable plan, your reimbursement or …

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The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.

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