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 benefits, it's important to understand the different types of employee reimbursements and how to account for them.
In this article, we'll take a look at four key types of employee reimbursements: business expenses, auto mileage and travel, medical expenses, and employee stipends.
Business expense reimbursement
First up, let's talk about business expense reimbursements. These are reimbursements from employers to their employees for business-related expenses incurred while performing work for an organization. But what exactly counts as employee business expenses?
According to the IRS, reimbursable expenses may include the following:
- Business travel costs
- Education or training
- Business supplies
- Business tools
- Miscellaneous business-related expenses
Employers can reimburse employees for any expenses if they include those reimbursements as taxable 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 plan1.
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 period. 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 expenses2.
Other states, such as California, require employers to reimburse their employees for their remote work expenses. This can include internet access costs, cell phone bills, and other tools needed for remote workers to do their jobs.
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 rates3, also known as cents per mile, 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 travel 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 rates4 every October for different regions within the U.S.
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 health benefits instead of traditional group health plans. 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.
According to our 2022 Employee Benefits Survey Report, 87% of employees value health benefits. Additionally, 65% of employees say they value being able to choose their own benefits.
With an HRA, you can offer your employees a quality health benefit that allows them to choose the individual health plan coverage they prefer. You also empower your employees by giving them the freedom to choose which expenses they want to get reimbursed for, all while you maintain complete cost control.
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 eligible 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. To participate, employees must have individual health insurance coverage, which can be paid for through ICHRA reimbursements.
A recent survey5 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 for employees based on their job classification (full-time employees, 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.
Employee stipends reimbursement
The final employee reimbursement type we'll discuss is employee stipends. Employee stipends are a flexible way to provide additional benefits and perks to your organization to help attract and retain top talent.
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. According to our 2022 Employee Benefits Survey Report, 42% of employees say if their employers had $200 extra to give each month, they'd rather have a separate benefit than a wage increase.
Let's break down the most popular types of employee stipend benefits.
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 like they would with an HRA. They are also an excellent option for businesses with group health insurance that want to give employees an allowance for individual dental or vision insurance premiums or mental health benefits not fully covered in the group plan.
Some expenses that can be reimbursed under a health stipend include:
- Insurance premiums
- Chiropractic care
- Out-of-pocket medical expenses
You can also reimburse employees for any type of health expense that you'd like. For example, you could also allow your employees to use their health stipend for mental health apps, gym memberships, or anything else.
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 much 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 such as software subscriptions, technology, and materials.
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.
Another common way stipends are used is to pay for employees' education-related expenses. This could include the reimbursement of tuition, student loans, textbooks, and other professional development expenses.
Education assistance is an IRS-approved tax-free fringe benefit of up to $5,250 per employee per year. This includes tuition reimbursement, continuing education courses, student loan repayment, and more. You can also reimburse employees for more expenses than the federal limit. However, any excess reimbursements are taxable wages.
With an employee stipend, you can provide a flat monthly allowance for your employees' education expenses or choose to only reimburse for certain categories, such as student loan repayment. Then, they can request reimbursement for whichever expense works best for them.
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.
No matter how you decide to reimburse employees, you'll want to create an expense reimbursement policy so that employees know how and when they can expect to be reimbursed.
If you're looking to bolster your benefits offerings by reimbursing your employees for their expenses, PeopleKeep can help. Our HRA and employee stipend personalized benefits administration software is here to help. With WorkPerks, you can easily offer your employees a fully customizable stipend for any category of your choosing, including health, wellness, remote work, and more. Administering your benefits only takes a few minutes every month!
This blog article was originally published on December 22, 2014. It was last updated on October 13, 2022.