The expenses must have a business connection; that is, they must have been paid or incurred while performing services as an employee.
- The employee must adequately account to the employer for these expenses within a reasonable time. You must require employees to provide you with detailed information on these expenses, including date, time, place, amount, and business purpose for the expense.
- You must require the employee to return excess reimbursements within a reasonable and specific period of time, depending on the circumstances. If employees are not required to turn in excess amounts, these amounts must be included in their income and they increase the cost of the bene
If all three of these requirements are not met, the plan is determined by the IRS not to be accountable.
Excess reimbursement is reimbursement greater than allowable amounts. If the employee doesn't return excess reimbursements within a reasonable period of time, these excess amounts are taxable to the employee. The most common circumstance would be a case in which you give an employee an advance before she leaves for a trip, and her expenses during the trip are less than the amount advanced.
A reasonable period of time for a return of excess reimbursements is determined by the IRS as, for example:
- An advance received within 30 days of the time of the expense.
- The employee furnishes an adequate account of expenses within 60 days after they were paid or incurred.
- The employee returns any excess reimbursement within 120 days after it was paid or incurred.
- The employee is given a statement (at least quarterly) that request return or adequate accounting for outstanding advances, and the employee complies within 120 days after receiving the statement.