Over the last six months, I have received several questions regarding the 60 day limit imposed on employee travel and reimbursements.
Why is the limit 60 days?
Because the deadline is set by the “safe harbor” provisions defined by the Internal Revenue Service (IRS) for tax-free reimbursements under the accountable plan rules. Regulation 1.62-2(g), defines the safe harbor for a reasonable period of time with respect to substantiating an expense as 60 days.
60 Days seems arbitrary
This enforcement of the 60 day limit seems arbitrary and subjective, but to the IRS, 60 days is considered a reasonable time frame for reimbursement, and that’s why they defined it as a “safe harbor” provision. However, I would point out that even if we set a different deadline, it would still seem arbitrary and subjective to any persons who exceeded the deadline. 60 days is considered reasonable for the University of Arizona and the majority of employers across the nation.
Partial Travel Reimbursements (i.e.: Paying for airline tickets in advance)
Departments should pay for airline tickets on the Procurement Card. However, if the traveler uses their own credit card and pays for the airline tickets in advance, the department can process a partial travel reimbursement within the 60 day window, even if it is before the trip occurs. The Disbursement Voucher should reference the travel authorization number and indicate in the notes that it is a partial reimbursement.
When does the 60 days start?
For travel, the sixty days start at the completion of the University travel event . For employee reimbursements the sixty days start when the purchase is made.
My department business office caused the delay
Even if the delay was caused by your department business office, we are still limited to the 60 days by the IRS. They view the University as one entity, not as several hundred individual departments. The only question is whether we (the institution) exceeded the 60 days or not.
It’s unfair that I have to have taxes deducted
To remain in compliance, the University must treat these payment as nonqualified. As such, we must collect the appropriate taxes and remit them to the taxing authorities. All tax deductions will be shown on the employees W-2. Depending on the individuals tax situation, they may or may not be refunded when the income tax return is filed. Each individual’s tax situation is different and we cannot advise employees about their individual tax situations. However, to mitigate the amount of taxes deducted from employees, the University spreads the collection over four pay periods. This reduces the amount collected because the increased taxable gross amount is spread over four pay periods and is subjected to graduated tax rates.
What is the accountable plan?
The accountable plan are the rules that were created by the IRS to identify when the University is permitted to make tax-free or qualified reimbursements to employees. Without the accountable plan rules all reimbursements would be taxable under the code.
What is a nonqualified expense reimbursement?
Under the code, if the reimbursement is made more than 60 days after the expense is incurred, the employer must consider the reimbursement as nonqualified and taxable to the individual. This is a compliance issue for the University and as such we have stepped up enforcement to ensure that the accountable plan remains qualified for the University. If the IRS determined the University was not in compliance, they could assess penalties and interest as well as invalidate our accountable plan. This would require all reimbursements to be taxable to employees.
If you have questions about the taxable employee reimbursements please contact FSO Operations at 621-9097 or speak with your departmental business office representative.
Scenario - Independent Contractor Expense Reimbursements
As part of the negotiated amount to perform services for the University, an Independent Contractor (Consultant) asks for a fee for services and "expense reimbursement". The department and Procurement agree and a purchase order is issued, but only the fee is encumbered. The independent contractor then submits an invoice and their original receipts to the department for payment at the completion of the assignment. The department authorizes payment for the invoice and creates a Check Request to reimburse the independent contractor for their travel expenses, using object code 6240 - out-of-state travel.
Issue: If the University allows the payment of the consultant's travel expenses under object code 6240, then we are treating the payments as nontaxable under the "accountable plan" which is only applicable to our employees.
The proper treatment should be to reimburse the expenses under object code 3230. This would allow the University to report the entire amount of the payments to the consultant on IRS Tax Form 1099.
Optimally, the department and consultant should submit an estimate of the expenses to be reimbursed as part of the total amount to be paid to the consultant, so that the amount can be encumbered. The department should ask the consultant to list their expenses on the invoice and provide "copies" of their original receipts as support for the amounts. The department can validate the expenses and submit the invoice for payment against the encumbrance, and the consultant would retain their original receipts and use them as expenses incurred in the operation of a business to reduce their taxable income.
A faculty member accepts a position at the University to begin in August, but asks for a "pre-house-hunting" trip to be paid by the University as part of his/her package. The department agrees and writes the request into the employment contract.
Issue: Only the physical relocation of the faculty member's household goods falls within the permissible qualified expenses for moving. Thus, anything outside of this would be considered nonqualified and taxable to the individual.
In this case, the entire pre-house-hunting trip is taxable and reportable to the employee. Our current procedures call for the reimbursement to be made at the time the employee is placed on payroll. This way, the entire amount can be added to the paycheck and have employment taxes deducted from the reimbursement.
If the employee cannot wait until they are placed on the regular payroll based on their start date, there is a way to place them on the payroll early, so that the reimbursement may be processed before the start date of the employee. Contact FSO Payroll Operations for the procedures http://www.fso.arizona.edu/Payroll/.
A prospective candidate asks the interviewing committee if he/she may bring their spouse and children with them on their interview visit. The Committee Chairman responds that it would be fine and that they will reimburse for ALL the expenses of the candidates visit. The business reason for the reimbursement is that the University wishes to attract the candidate and the decision would involve the spouse.
Issue: While it may be considered a valid business expense by the departmental representatives, only the portion of the expenses directly related to the candidate are reimbursable under the "accountable plan" as tax-free. All of the expenses incurred on behalf of the spouse and children are considered taxable to the beneficiary, in this case, the candidate.
This problem demonstrates the difference between a qualified (nontaxable) and a nonqualified (taxable) transaction. In this case, the processing of the reimbursement will generate a 1099 to the recipient. The candidate will receive a check for the entire amount of the expense reimbursement request, but will also receive a 1099 in January to include the nonqualified reimbursement as taxable income.
The process for payment requires the department to split the expenses on the check request and list which are for the candidate and which are for the spouse and children.
Unless the department explains this to the candidate, the candidate may be confused when they receive the 1099 in January and wonder why the University has reported taxable income to the IRS.
------------------
All contents copyright © 2012. Arizona Board of Regents.
