Nearly every organization has times when they need to reimburse employees for expenses. Whether the expense is for office supplies, a business dinner, travel to an expo, or healthcare, it's important to understand the different types of employee reimbursement and how to account for them.
Let’s take a look at three key types.
1) Business expense reimbursement
Business expenses are incurred by an employee while performing work for an organization. According to the IRS, business expenses may include the following:
- Business travel (discussed more in the next section)
- Education or training
- Business supplies
- Business tools
- Miscellaneous business-related expenses
Tax deductible business expense reimbursements
Some expenses are tax-deductible. For a business expense to be tax-deductible to the business and received tax-free by the employee, they must fall under the definition of an “accountable plan” and meet these three requirements:
- The employee must have 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 period. Receipts need to verify the date, time, place, amount, and what the business expense was for.
- The employee must return any excess reimbursement or allowance within a reasonable time period. For example, if an employee is provided $20 to purchase office supplies, and the actual expense was $17, the employee needs to return the $3 to the business.
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 there are some specific characteristics of travel reimbursement that 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 vehicle. Most businesses use the standard IRS mileage rates when reimbursing employees for personal automobile travel. Check out IRS Mileage Rates for this year's information.
- Per diem travel. If employees are traveling for work, the employer can offer a fixed “Per Diem” allowance for lodging (excluding taxes), meals, and incidental travel expenses. 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 for different regions within the U.S. (click here to look up rates).
3) Medical expense reimbursement
Common types of medical expense reimbursement "plans" include:
- Qualified small employer health reimbursement arrangements (QSEHRAs). QSEHRAs allow 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 do not offer a group health plan. 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 also free of income tax for the employee, provided the employee has insurance that qualifies as minimum essential coverage (MEC).
Download our guide to offering a QSEHRA
- Individual coverage health reimbursement arrangements (ICHRAs). ICHRAs first became available in 2020. ICHRAs give employers much more flexibility than QSEHRAs. They can be used by employers of any size and have no contribution limits. They also enable employers to set different reimbursement amounts to employees based on their job classification (for example, full-time, part-time, salaried, hourly, seasonal, etc.). 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 2022. Unlike QSEHRAs, ICHRAs can be offered to classes of employees that aren’t offered a group health plan.
Download our guide to offering an ICHRA
- Group coverage health reimbursement arrangements (GCHRAs). Unlike ICHRAs and QSEHRAs, a GCHRA allows employers to reimburse employees on a group plan for expenses their plan doesn’t cover. Employers are finding GCHRAs are a great way to make high deductible plans work well for employees and are also useful for creating top-tier luxury health benefits to attract top talent.
Download our guide to offering a GCHRA
Not sure which HRA is right for your organization?
Organizations reimburse employees for a wide variety of expenses, including office supplies, meals and travel while conducting business, and even medical expenses. Depending on the type of expense and the way employers handle these reimbursements, many of them can even be tax free.
This post was originally published on December 22, 2014. It was last updated December 4, 2020.