Accountable Reimbursement Plan Guidelines

Accountable reimbursement plans are a valuable resource for most churches and nonprofits. The size of your organization does not matter! Even the smallest churches and nonprofits should set up an expense reimbursement policy in order to legally reimburse their staff and volunteers.

Accountable reimbursement plans

An accountable reimbursement plan is an employee reimbursement arrangement or method for reimbursing employees for legitimate business (church/nonprofit) expenses.

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

However, reimbursing expenses tax free could turn into a nightmare for a church and their minister and/or staff if not done properly.

If there is no accountable reimbursement plan in place or 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.

How to setup an Accountable Reimbursement Plan

See how to properly set up and administer an accountable reimbursement plan in my 16 page ebook:

Accountable Reimbursement Plans 

It also includes an example of a REQUIRED resolution ... PLUS examples of what to include in the plan and what not to include!

There are some very important DOs and DON'Ts on "often used" reimbursements as mileage and meals! 

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NOTE: the Accountable Reimbursement Plans ebook is also available in the last section of the "Minister Compensation and Taxes" ebook! You can purchase it for only $12.95!


How to Setup and Administer a Accountable Reimbursement Plan

Note that the rules for employee expense reimbursements are the same for churches and nonprofits as they are for all other businesses.

There are not any special rules for churches or nonprofits in relation to employees’ business expenses.

 In order to be accountable, your reimbursement policy should comply with the following rules:

  • Be adopted
  • Be written
  • Have a business connection
  • Require proper substantiation 
  • Require substantiation be submitted within a "reasonable" period of time
  • Require excess reimbursements be returned

Please read my ebook "Accountable Reimbursement Plans" available above for more details on those rules and how to implement them.

NOTE: Reimbursements cannot be made by reducing the employee's salary!

Adopting Appropriate Policies:

Before reimbursing 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. 

3 Requirements:

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".

There are 2 methods that meet the "reasonable time" requirements. See more on the fixed date and periodic statement methods in my Accountable Reimbursement Plan ebook.

6 Tips on Setting Up an Accountable Reimbursement Plan

How to legally reimburse church employee expenses

1) Include a budget for your accountable reimbursement plan that will “cap” the allowable amount for each staff member.

2) Include the proper wording in your policy to cover reimbursing your staff member directly for their eligible expenses and/or paying for those expenses directly. Either method is acceptable and you can include both in your policy.

3) Properly substantiate expenses. The IRS requires the church or nonprofit to maintain good records and have actual receipts for any expense over $75 (you may use this figure or set a lower limit such as $25) and proper documentation to back up expenses.

The documentation must include:

  • the purchase
  • amount
  • date
  • place
  • business nature of the expense

Church Accounting Package

Managing bookkeeping for churches can present unique challenges. Apart from standard accounting procedures, there is the additional task of managing restricted funds alongside the overall financial records.

You might be facing a chart of accounts overloaded with numerous unnecessary accounts from past volunteers. On top of that, you've come across errors in your payroll entries. These ebooks on church bookkeeping are specifically designed to assist you in handling these issues effectively.

Description page for the ebooks and bonuses included in the Bookkeeping for Churches Package

4) Include a set time of when substantiation/receipts must be provided to your organization in the wording of your policy.

5) Include wording authorizing advance payments.This can be especially beneficial for staff travel. Important...if an advance is given and exceeds the amount of business expenses substantiated, the staff person must return the excess within a "reasonable" time of the date incurred or paid.

6) Include wording that items, equipment, or property purchased by your church or nonprofit through the accountable reimbursement policy belongs to your organization. It would not pertain to small items such as small office supplies or personal religious items, such as robes. These items are used up or are so personal that they have little or no value to the church.

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.

MORE Accountable Reimbursement Plan 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)?

Note: Unsubstantiated business expenses can be a big headache for everyone involved in the financial process of the church. See the effect of unsubstantiated business expenses in a church and how to prevent them.

Accountable Reimbursement Plan for Meals

Reimbursing Pastor for Meals

I have been asked this frequently enough that I am adding it on to this article...just so I can point my clients to it =)

Can we reimburse our Pastor for meals?

When I am asked this answer is always..."It depends." Here is what I ask to figure out whether they can lawfully reimburse or pay for pastoral meals. (This goes for my non-profit administrators too.)

Was it a "business" meal? If not, then cannot reimburse or pay for their "personal" meals....unless they are "travel meals".

If you have an approved accountable reimbursement plan in place? If you don't have one...get one set up as soon as possible because you can't legally reimburse those "business meals" tax free without a proper AR policy in place.

If you do have an AR policy, was the meal or entertainment directly related to church/ministry/nonprofit organization business? Startchurch posted a great article on that subject:  Are There Limits on Pastoral Lunch Expenses?

Your accountable reimbursement plan should include some guidelines on when it is proper to include the spouse in that meal/entertainment reimbursement as well.

If it was for business purposes...make sure and DOCUMENT who they were with and the purpose of the meeting. I tell my clients to flip over that meal receipt and quickly jot down those details, so they will be able to remember them when they turn those receipts in and fill out a expense reimbursement form.

And finally...there are different situations where "meals" can be reimbursed or paid for with your church or organization's check or debit/credit cards. Make sure you outline them in your AR policy. For example, paying for meals while traveling is different than the Pastor taking a guest speaker out to lunch. They need to be recorded separately in your accounting and have different guidelines in your AR policy.

Most policies state that the organization will pay for meals when traveling over 75 miles from home. However, an individual requiring about my bookkeeping service became very irate with me when I told him ...even with a proper accountable reimbursement policy in place...the church could not legally pay for that daily donut and coffee stop and lunch stop around town just for himself.

I informed him that those meal expenses were not nontaxable reimbursements since he was not "meeting" with other individuals about official "church" business, so those amounts should be reported in Box 1 of his W-2.  

His reasoning was that he was about town doing church business and the church should pay for his meals. I explained that even though I am out all day visiting business cannot reimburse me for the meals I eat out ...unless I am meeting a client for lunch AND there is a business purpose involved OR I was at a conference over 75 miles from home. 

Follow the guidelines in this article and research IRS publications and topics that relate to employee expenses and write detailed accountable reimbursement guidelines to include with your Accountable Reimbursement Plan, so everyone will know what you can legally and properly reimburse/pay and what you cannot.


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