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.

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 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!

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

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.

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)?

Accountable Reimbursement Plan 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 question...my 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 no...you cannot reimburse or pay for their "personal" meals....unless they are "travel meals".

If yes...do 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 clients...my 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.

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