Nearly every organization has times when they need to reimburse employee expenses. Whether it’s for office supplies, moving expenses, travel to an expo, or even health and wellness, it's important to understand the different types of employee reimbursement and how to account for them.
In this article, we’ll take a look at four key types of employee reimbursements:
- Business expense reimbursement
- Auto mileage and travel reimbursement
- Medical expense reimbursement
- Employee stipends reimbursement
1. Business expense reimbursement
First up, let’s talk about business expense reimbursements. These are reimbursements from employers to employees for business-related expenses incurred by an employee while performing work for an organization. But what exactly counts as employee business expenses?
According to the IRS, business expenses may include the following:
- Business travel
- Education or training
- Business supplies
- Business tools
- Miscellaneous business-related expenses
Employers can reimburse employees for any expenses if they include those reimbursements as income. However, there are rules for what can be reimbursed tax-free.
Tax-deductible business expense reimbursements
Some business expenses are tax-deductible. For a business expense to be considered tax-deductible to the business and received tax-free by the employee, it must fall under the definition of an accountable plan.
To be considered an accountable plan, your reimbursement arrangement must meet the following IRS guidelines:
- The expenses must have a business connection. Employees must have been paid for or incurred expenses while performing services as an employee and work for the organization must be associated with the expenditure.
- The employee must adequately account for these expenses within a reasonable time. Receipts need to verify the date, time, place, amount, and what the business expense was for. The IRS defines a reasonable time as 60 days after the expense is paid or incurred, although they do consider individual circumstances.
- The employee must return any excess reimbursement or allowance within a reasonable time period, usually 120 days. For example, if an employer provides an employee with $20 to purchase office supplies and the actual expense is $17, the employee must return the $3 to the organization.
As long as the expense and reimbursement meet these guidelines, you don’t have to list the reimbursement on your employee’s W-2s. However, if your reimbursement doesn’t meet the rules for an accountable plan, it should be reported on your employee’s W-2.
It’s worth noting that under the Fair Labor Standards Act (FLSA), you aren’t required to reimburse employees for expenses as long as it doesn’t reduce an employee’s wage below minimum wage. But, many states have laws requiring employers to reimburse business expenses.
2. Auto mileage and travel reimbursement
Another type of employee reimbursement is for auto mileage and travel expenses. Technically, this is a type of business expense reimbursement; however, some specific characteristics of travel reimbursement set it apart from the other types.
Standard mileage rates
Mileage rates are a way to reimburse employees for gas and wear and tear on their vehicles. Most businesses use the standard IRS mileage rates when reimbursing employees for personal automobile travel.
The IRS calculates standard mileage rates yearly to determine the deductible costs of operating a vehicle. For 2022, the standard mileage rate is $0.585 per mile driven for business use.
Per diem travel
Employers can offer a fixed per diem allowance for lodging (excluding taxes), meals, and incidental travel expenses if employees are traveling for work.
Employers can use this as a “maximum reimbursement amount” and gather and track receipts, or they can assume expenses will reach this amount and reimburse the employee the entire amount whether they use it or not to avoid the hassle of tracking the expenses.
The General Services Administration (GSA) establishes per diem rates every October for different regions within the U.S.
3. Medical expense reimbursement
Medical expense reimbursement plans (MERPs) are another type of employee reimbursement. Reimbursing medical expenses is an alternate way for employers to offer employees a health benefit. They are also known as Section 105 plans.
One type of MERP, a health reimbursement arrangement (HRA), is a great way to reimburse employees for their healthcare expenses. There are three popular types of HRAs that we’ll explore below.
Qualified small employer HRA (QSEHRA)
A qualified small employer HRA (QSEHRA) allows employers to set a monthly or annual allowance to reimburse employees tax-free for insurance premiums and expenses the IRS considers eligible under Publication 502. They can only be used by employers with fewer than 50 employees who don’t offer a group health plan to any employees.
They are simple to deploy and manage and have maximum contribution limits, which the IRS adjusts every year. Reimbursements are free of payroll tax (FICA) for the employer and employee and free of income tax for the employee, provided the employee has insurance that qualifies as minimum essential coverage (MEC).
Individual coverage HRA (ICHRA)
Individual coverage HRAs (ICHRAs) give employers much more flexibility than QSEHRAs. They can be used by employers of any size and have no contribution limits.
A recent survey by Willis Towers Watson found that 15% of all employers (1 in 6) and 20% of large employers plan to offer an ICHRA by the end of 2022.
ICHRAs enable employers to set different reimbursement amounts to employees based on their job classification (full-time, part-time, salaried, hourly, seasonal, etc.). Unlike QSEHRAs, ICHRAs can be offered to classes of employees that aren’t offered a group health plan.
Group coverage HRA (GCHRA)
Unlike ICHRAs and QSEHRAs, a group coverage HRA (GCHRA), also called an integrated HRA, allows employers to reimburse employees on a group health insurance plan for expenses their plan doesn’t cover or fully pay for. It’s tax-free and gives you more control over your health benefit costs.
Employers are finding GCHRAs are a great way to make high deductible plans work well for employees and create top-tier luxury health benefits to attract top talent.
4. Employee stipends reimbursement
The final employee reimbursement type we’ll discuss is employee stipends. Employee stipends are a flexible way to provide additional benefits to your organization.
Stipends allow you to set monthly allowances for your employees and customize employee classes and benefits to fit your organization's needs. With a stipend, employees submit reimbursement requests with their expenses for approval.
Many employees even prefer added perks to a yearly pay raise, as stipends can cover a range of expenses. Let’s break down the top three types of employee stipend benefits: health, wellness, and remote work.
A health stipend reimburses employees for their qualifying medical expenses. They work similar to an HRA, except they’re taxable and have fewer regulations.
Health stipends are best for businesses with employees who receive premium tax credits, as they don’t have to waive their credits to use the benefit. They are also an excellent option for businesses with group health insurance who want to give employees an allowance for individual dental or vision insurance premiums.
Some expenses that can be reimbursed under a health stipend include:
- Insurance premiums
- Chiropractic care
- Out-of-pocket medical expenses.
Wellness stipends reimburse employees for general wellness expenses other than medical expenses. They work the same way as a health stipend, where employees receive a monthly allowance. Employees can then request reimbursement for wellness expenses.
Popular expenses that can be reimbursed by a wellness stipend are:
- Gym memberships
- Fitness classes
- Exercise equipment
- Meditation apps
- Fitness trackers
Wellness stipends can improve employee retention and improve their overall health, keeping them engaged and productive on the job.
Remote work stipends
A remote work stipend is a monthly allowance provided to employees to help reimburse their home office expenses. Unlike business expenses, which must meet IRS accountable plan requirements to be tax-free, remote work stipends are taxable. This means it can be offered for a broader range of home office expenses.
With many people working from home, offering a remote work stipend is a great perk. It can help your employees pay for their internet bills, as they’ll be using a lot of their bandwidth for work purposes. You can also reimburse employees for their phone bills if they use their phones for work, among other expenses.
Remember that list of states that require employers to reimburse employees for business expenses? That also includes remote work expenses. Offering a remote work stipend is a great way to satisfy these state laws while helping to support your remote workforce.
Organizations reimburse employees for various expenses, including office supplies, meals and travel while conducting business, and medical expenses. Depending on the type of expense and how employers handle these reimbursements, many of them can even be tax-free.
Are you looking to provide your employees with health, wellness, or remote work reimbursements? Our WorkPerks personalized benefit administration software is here to help. With WorkPerks, you can easily offer your employees a fully customizable health, wellness, or remote work stipend. Administering WorkPerks only takes a few minutes every month!
This blog article was originally published on December 22, 2014. It was last updated on March 3, 2022.