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What is a Reimbursement Plan?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 August 2016
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A reimbursement plan is a structured strategy for repaying individuals who have incurred expenses on behalf of another entity. The most common example of this type of plan has to do with covering expenses incurred by employees as they carry out their job responsibilities. Plans of this type make it possible to ensure the employee is reimbursed in a timely manner, while also aiding the employer in keeping accurate records regarding the entire cost associated with the performance of a given task.

Reimbursement plans can be structured as accountable and non-accountable. An accountable plan calls for the employee to submit receipts for the expenses that qualify for reimbursement. A non-accountable reimbursement plan covers expenses where no receipt is required, although the employee does have to declare the expense in writing before he or she is reimbursed. For example, an employee who takes clients out to dinner will need to present the receipt for the meal in order to be compensated for the expenses. At the same time, if the employee uses his or her private vehicle in the course of completing tasks on behalf of the employer, he or she submits the total amount of mileage used, usually on an expense voucher or claim form. The employer determines the amount of reimbursement issued, based on current regulations and practices that apply.

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In terms of tax deductions, an employee who participates in a reimbursement plan is normally not allowed to claim the compensated expenses as deductions on their personal income tax returns. The employer can claim the expenses that were reimbursed as deductions, subject to the provisions contained in the tax laws currently in place in the jurisdiction where the company is located. In some countries, the employee may have to declare certain forms of reimbursement as income, especially in situations such as mileage where there is no specifically documented out-of-pocket expense.

A wide range of expenses may be covered in a reimbursement plan. Employees who travel as part of their work are often allowed to submit expenses such as airfare, lodgings, car rentals, and meals for reimbursement. An employee may also be compensated for expenses incurred while working on a special project for the company, such as serving as the representative of the business at a local event. Often, government regulations define the scope of what is considered a reimbursable expense, and what procedures must be followed in order for the employer to claim the reimbursed expense when filing tax returns. These regulations typically shape the internal policies and procedures used by a business to structure and carry out the reimbursement plan.

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