Introduction
Nonprofits often reimburse employees, board members, and volunteers for business-related expenses. But how these reimbursements are structured can significantly impact tax compliance, reporting, and operational efficiency. The IRS recognizes two types of reimbursement plans: accountable plans and non-accountable plans. Understanding the difference is essential for nonprofits to remain compliant and avoid unnecessary tax burdens.
In this article, we’ll explore the key differences, IRS requirements, and best practices for implementing an accountable plan that benefits your nonprofit organization.
What Is an Accountable Plan?
An accountable plan is an IRS-compliant reimbursement policy that allows nonprofits to reimburse employees and volunteers for business-related expenses without considering them taxable income. To qualify, the plan must meet three key criteria:
1. Business Connection
- The expenses must be directly related to the nonprofit’s mission and operations.
- Common examples include travel expenses, supplies, and training costs.
2. Substantiation
- Employees and volunteers must provide receipts, invoices, or detailed records of expenses.
- The documentation should include who, what, when, where, and why the expense was incurred.
3. Return of Excess Reimbursements
- If an employee receives more than they actually spent, they must return the excess amount within 120 days.
Tax Benefits of an Accountable Plan for Nonprofits
- Tax-Free Reimbursements: Employees and volunteers do not pay income tax on reimbursed amounts.
- No Payroll Tax Liability: Nonprofits do not have to withhold FICA taxes on reimbursements.
- IRS Compliance: Helps avoid tax penalties and audits.
What Is a Non-Accountable Plan?
A non-accountable plan is a reimbursement arrangement that does not meet IRS requirements. Under this type of plan:
- The nonprofit provides fixed allowances or lump sum payments without requiring receipts.
- Employees are not required to return excess reimbursements.
- Reimbursements are treated as taxable income, appearing on the employee’s W-2 and subject to payroll taxes.
Why Nonprofits Should Avoid Non-Accountable Plans
- Increased Tax Burden: Employees must pay income tax on reimbursements.
- Additional Payroll Costs: The nonprofit must withhold FICA and Medicare taxes.
- Audit Risk: Failure to comply with IRS guidelines can result in penalties and potential loss of nonprofit status.
How to Implement an Accountable Plan for Your Nonprofit
To ensure compliance and protect your nonprofit’s financial health, follow these best practices when setting up an accountable reimbursement plan:
1. Create a Written Accountable Plan Policy
- Define eligible expenses (e.g., travel, supplies, professional development).
- Establish record-keeping and reporting requirements.
- Set timelines for submitting reimbursement requests and returning excess funds.
2. Require Proper Documentation
- Employees and volunteers must submit receipts and a written expense report within 60 days of incurring the expense.
- Mileage reimbursement should follow IRS standard mileage rates.
3. Process Reimbursements Through Payroll or Accounts Payable
- Ensure reimbursements are not included on W-2 forms.
- Maintain clear audit trails for IRS compliance.
4. Train Employees and Volunteers
- Educate staff on how to properly document expenses.
- Regularly review IRS guidelines and updates to ensure compliance.
Frequently Asked Questions (FAQs)
1. Can Nonprofits Reimburse Volunteers Under an Accountable Plan?
Yes! Volunteers can be reimbursed for out-of-pocket expenses related to nonprofit activities, as long as they provide proper documentation.
2. What Happens If an Employee Doesn’t Submit Receipts?
If an employee fails to substantiate expenses, the reimbursement must be treated as taxable income under a non-accountable plan.
3. Can a Nonprofit Give Employees a Flat Stipend Instead of Reimbursements?
Yes, but stipends are taxable income unless receipts are provided and the plan meets IRS accountable plan requirements.
Conclusion
Implementing an accountable plan is essential for nonprofits that want to reimburse employees and volunteers tax-free while staying compliant with IRS regulations. By maintaining proper documentation and ensuring excess reimbursements are returned, nonprofits can avoid tax liabilities and keep financial resources focused on their mission.
Need help setting up an accountable plan for your nonprofit? Consult with a tax professional or nonprofit accountant to ensure compliance with IRS guidelines.
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