Policy required document Workplace
Expense and Travel Reimbursement Policy
An expense policy says what the company pays for, how employees claim it, what proof they must submit and by when, and what happens to money they were advanced but did not spend. The tax code gives the document a precise job.
Reimbursements are excluded from an employee's wages only if they are paid under an accountable plan: the expenses must have a business connection, the employee must substantiate them within a reasonable period, and the employee must return any excess within a reasonable period (26 CFR 1.62-2).
A reimbursement arrangement that fails any one of the three is a nonaccountable plan, and every dollar paid under it is wages, subject to withholding and employment taxes, for the employee and the employer. The regulation supplies safe harbors: substantiation within 60 days and return of excess within 120 days, or a quarterly statement with 120 days to respond.
The policy is where those deadlines are written down.
The second job is the state reimbursement duty. California Labor Code 2802 requires the employer to indemnify employees for all necessary expenditures in direct consequence of their duties, with attorney fees to the employee who has to sue; Illinois, Iowa, Minnesota, Montana, New Hampshire, New York (for certain deductions), Pennsylvania, South Dakota, Washington DC and others have statutes or rules to similar effect.
In those states a policy cannot refuse to reimburse a necessary expense, and an unreimbursed one is a wage claim. The third job is fraud control. Expense fraud is small per claim and continuous, and the policy's receipt threshold, approval routing and audit sample are the controls an auditor asks about.
Obligation ledger
Who requires it, and what each one says.
| Source | Applies when | What it requires | Status |
|---|---|---|---|
| Treasury regulations, reimbursement and expense allowance arrangements 26 CFR 1.62-2 | Every employer that reimburses or advances expenses | To be an accountable plan the arrangement must require a business connection, substantiation of the amount, time, place and business purpose within a reasonable period, and return of amounts in excess of substantiated expenses within a reasonable period; safe harbors of 60 days to substantiate and 120 days to return excess, or a periodic statement method. Amounts under a nonaccountable plan are wages. Legally required for the exclusion from income. | Mandatory |
| California Labor Code, indemnification for necessary expenditures Cal. Lab. Code 2802 | Every California employer | Indemnify the employee for all necessary expenditures or losses incurred in direct consequence of the discharge of their duties, including attorney fees incurred enforcing the section. A policy cannot cap or exclude a necessary expense. Legally required. | Mandatory |
| Illinois Wage Payment and Collection Act, reimbursement of expenses 820 ILCS 115/9.5 | Every Illinois employer | Reimburse necessary expenditures within the scope of employment; a written expense policy may set limits that bind unless the employer authorized or required the expense, and a policy providing no or de minimis reimbursement does not protect the employer. | Mandatory |
| Uniform Guidance, cost principles 2 CFR 200.474, travel costs | Recipients of federal awards | Travel costs are allowable if reasonable, consistent with the recipient's written travel policy, and documented; charges for lodging, subsistence and incidentals must be justified and comply with the written policy. A written policy is the condition of allowability. Legally required for grantees. | Mandatory |
Required sections
- A statement that the policy is intended to be an accountable plan under 26 CFR 1.62-2, and that reimbursements outside it are wages
- What is reimbursable: travel, lodging, meals, mileage at the IRS rate or the company's rate, phone and internet where required, equipment, and what is not
- Substantiation: receipts above a stated threshold, the business purpose, attendees for meals, and submission within the deadline the safe harbor allows
- Advances and corporate cards: return of unused advances and personal charges within the deadline
- Approval routing: who approves whose expenses, and the rule that no one approves their own
- Per diem, if used, at the federal rate or the company rate, and how it is documented
- The state schedule: California, Illinois and the other states where necessary expenses must be reimbursed regardless of the policy's limits
- Remote work costs, cross-referenced to the remote work policy
- Audit: that claims are sampled and that false claims are misconduct
- Timing of payment and the payroll treatment of anything not substantiated
What the examiner asks for
What changed
Change log.
Frameworks
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From the publisher
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Questions
What people ask.
We just pay a flat monthly allowance. Is that a problem?
A flat allowance with no substantiation and no return of excess is a nonaccountable plan, so it is wages: taxable to the employee and subject to employment taxes for the company. It also may not satisfy California's duty to reimburse actual necessary costs. A stipend can work if it is tied to a documented estimate and the policy allows employees to claim more.
What deadlines should we set?
The regulation's safe harbor: substantiation within 60 days of the expense and return of any excess within 120 days. Companies commonly set 30 and 60 days internally. The policy should state the deadline and the consequence, which is that late or unsubstantiated amounts are treated as wages.
Can we refuse to reimburse an expense the employee did not get approved first?
Outside the reimbursement states, yes, if the policy says so. In California, a necessary expense incurred in direct consequence of the job must be reimbursed whether or not it was pre-approved; the remedy for ignoring the approval rule is discipline, not non-payment.
Do we have to use the IRS mileage rate?
No. The IRS rate is a safe harbor for the amount that is excludable. A lower rate is allowed for tax purposes, but in California and similar states a rate that does not cover the employee's actual cost leaves a shortfall the employee can claim.