Article by Ron Chapman, Jr. and Jayde Ashford Brown
Every year, employers lose significant money on employees’ inaccurate or fraudulent requests for expense reimbursements. According to the Association of Certified Fraud Examiners’ Report to the Nation, the estimated median amount lost to businesses in 2014 due to expense reimbursement fraud was $30,000. Clearly, employers face significant challenges in effectively managing employee expense reimbursements. Below are five best practices that can help minimize reimbursement challenges.
1. Identify the Method and Timing of Reimbursement
Employers first should decide the method and timing of expense reimbursements. While there is no set rule and state law may vary, some options to consider are: reimburse employees based on actual use; provide a monthly stipend or “lump sum” to cover the cost of expenses; or set a guaranteed percentage of expenses to be covered. Additionally, employers should be sure to impose a clear timeframe for submitting and reimbursing expenses.
2. Apply the Rules Consistently
Although the amount of reimbursement can vary, employers should document a good-faith, transparent effort to provide reimbursement to all employees. Employers should apply their reimbursement policy consistently and avoid reimbursing some employees but not others for similar expenses.
3. Be Mindful of Tax Considerations
For reimbursement payments to be exempt from payroll and income taxes, the payments must be made pursuant to an “accountable plan.” To be deemed “accountable,” an employer’s reimbursement plan must satisfy three rules: (1) the expenses reimbursed under the plan must have a business connection; (2) the employee must adequately account to the employer for these expenses within a reasonable period of time; and (3) the employee must return any excess reimbursement within a reasonable period of time. Thus, employers should require employees to submit or otherwise maintain detailed receipts documenting each expense incurred. In the case of mileage, employers may accept travel logs prepared by employees or other means of preserving the information, although the former necessarily runs the risk of employees accidentally or intentionally inflating the mileage actually incurred.
Employers that combine wages and business expense reimbursements in a single paycheck should separately identify the expense amount on the employee’s wage statement so that employees and government agencies can ascertain the amount of the employee’s compensation attributable to reimbursement for work-related expenses.
4. Implement a Clear and Well-Written Policy
Employees often request reimbursement for expenses incurred in the performance of their duties, whether for mileage, lodging, meals, or other business expenses. While there is no federal law requiring employers to maintain an expense reimbursement policy, a clear and well-written policy will help set expectations of both the employer and employees and maintain compliance with the employer’s preferred practice. Employers may outline the reimbursement policy in the employee handbook or administer it as a stand-alone document. Significantly, an effective reimbursement policy does not need to be complex and should not be expensive to create or implement. Rather, employers should strive to implement a policy that (1) provides employees with a clear and consistent understanding of what expenses are (and are not) covered, (2) explains what constitutes acceptable documentation to support reimbursable expenses, and (3) outlines the process for submitting the expense reimbursement requests and consequences for failing to comply.
5. Check State and Local Laws
While many states are silent on the issue of expense reimbursement, others impose reimbursement regulations that can present traps for unwary employers. For example, some states, including California, mandate that employers reimburse “proper” expenses. Other states, like New Hampshire, require employers to reimburse employees for certain expenses within 30 days of the employee presenting the employer with proof of the payment. Employers should review state laws for each state in which it has employees to identify any laws addressing reimbursements or the manner in which they are made.
By following these tips, employers can help mitigate the risk of paying inflated, fraudulent, or untimely expense reimbursement claims.
Ron Chapman, Jr. is a shareholder in the Dallas office of Ogletree Deakins, an international labor and employment law firm, and a member of the firm’s Board of Directors. Jayde Ashford Brown is an associate in the firm’s Dallas office. They can be reached at 214.987.3800.