Q&A: Tax Issues for Accountable Reimbursement Plans

How should we set up an accountable reimbursement plan?

Richard R. Hammar, Attorney, CPA
Bio
Our church has adopted a fully accountable reimbursement policy for business expenses, using advances rather than reimbursements. We advance each of our pastors a set amount of funds twice a month. Each pay period they receive salary, housing allowance, and the advance allowance. I am trying to clarify some accounting issues regarding our accountable plan. My first question is if there is a specified number of days during which the advances must be spent. Do the funds in fact have to be used within 60 days or can the church board set the number of days? Can it be 90 days or can it be on a calendar year basis? I do know that whatever funds they don’t use must be returned or added to their W-2 as taxable income.

To be an accountable plan, your church’s reimbursement or allowance arrangement must include all of the following requirements:
  1. Employees’ expenses must have a business connection—that is, employees must have paid or incurred deductible expenses while performing services as an employee of your church.
  2. Employees must adequately account to the church for these expenses within a reasonable period of time.
  3. Employees must return any excess reimbursement or allowance within a reasonable period of time.
  4. The definition of reasonable period of time depends on the facts and circumstances of each case. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:
  6. Employees receive an advance within 30 days of the time they incur an expense.
  7. Employees adequately account for their expenses within 60 days after the expenses were paid or incurred.
  8. Employees return any excess reimbursement within 120 days after the expense was paid or incurred.
  9. Employees are given a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the statement.
  11. If an employee does not adequately account for or does not return any excess advance within a reasonable period of time, the amount not accounted for or returned is treated as having been paid under a nonaccountable plan. As a result, the church must combine the amount of any reimbursement or other expense allowance paid under a nonaccountable plan with the employee’s wages, and it must be reported in box 1 of the employee’s Form W-2.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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