With regard to cash advances for employee travel expense and entertainment reimbursements, the IRS defines and distinguishes between accountable and non-accountable plans. Non-accountable plan reimbursements must be reported in box 1 of an employee's W-2 as wages. Reimbursements under an accountable plan are not reported as income, provided they meet the rules for accountable plans. To qualify as an accountable plan, a reimbursement policy must meet three rules:
- the expenses must have a business connection — that is, the employee must have paid or incurred deductible expenses while performing services as an employee of your company
- they must adequately account to you for these expenses within a reasonable period of time and
- they must return any excess reimbursement or allowance within a reasonable period of time
The IRS defines a reasonable period of time as follows: advance is made to an employee 30 days prior to the expense, an accounting of expenses is made within 60 days after the expense, and return of excess reimbursement is made within 120 days after the expense was paid or incurred. According to IRS publications and confirmed today by IRS agent Hilliard (#1006010), if an employee does not account for expenses or return excess reimbursements within a reasonable period of time as defined above, then the advance is considered a taxable benefit that should be reported as income on the employee's W-2. See a discussion of accountable and non-accountable plans in IRS publication 535, and see table 13-1 on page 51 for a handy guide showing what and when to report on an employee's W-2 form under accountable and non-accountable plans. This may provide you the backing you need to issue a firm policy on timely report submission.