Wages can't be recharacterized as nontaxable reimbursements
Rev Rul 2012-25, 2012-37 IRB 337
A new ruling clarifies that an arrangement that
recharacterizes taxable wages as nontaxable reimbursements or allowances, for
example, to provide a tool reimbursement for employees, does not satisfy the
business connection requirement of the Code Sec. 62(c) accountable plan rules.
Thus, the reimbursements are treated as made under a nonaccountable plan and
are taxable. The ruling illustrates its holding by way of four detailed
situations.
Reimbursements are
tax-free to the employee and aren't subject to withholding or payroll taxes if
made under an accountable plan. To be treated as made under an accountable
plan, a reimbursement must meet all of the following requirements:
(1)
The reimbursed expense must be allowable as a
deduction and must be paid or incurred in connection with performing services
as an employee of the employer; (Reg. § 1.62-2(d)(1))
(2)
Each reimbursed expense must be adequately
accounted for to the employer within a reasonable period of time; (Reg. §
1.62-2(e)) and
(3)
Any amounts in excess of expenses must be
returned within a reasonable period of time. (Reg. § 1.62-2(f))
If the above requirements aren't met, reimbursements are
treated as made under a nonaccountable plan and are subject to withholding and
employment taxes, and must be treated as wages paid to the employee.
Under Reg. § 1.62-2(c)(1), an arrangement satisfies the
business connection requirement if it provides advances, allowances, or
reimbursements only for business expenses that are allowable as deductions by
part VI, subchapter B, chapter 1 of the Code, and that are paid or incurred by
the employee “in connection with the performance of services as an employee of
the employer.” Under Reg. § 1.62-2(d)(3)(i), the business connection
requirement isn't satisfied where a payor pays an amount to an employee
regardless of whether he incurs or is reasonably expected to incur deductible
business expenses or other bona fide expenses related to the employer's
business.
In Rev Rul 2012-25, IRS labels the failure to meet the Reg.
§ 1.62-2(d)(3)(i) reimbursement requirement of business connection as “wage
recharacterization” because the amount being paid is not an expense
reimbursement, but rather a substitute for an amount that would otherwise be
paid as wages.
Wage recharacterization sinks accountable plan
reimbursements. In Rev Rul 2012-25, IRS reiterates its position that while an
employer may establish or modify its compensation structure to include
nontaxable reimbursement under an accountable plan, recharacterizing as
nontaxable reimbursements amounts that would otherwise be paid as wages
violates the business connection requirement of Reg. § 1.62-2(d), and more
specifically the reimbursement requirement of Reg. § 1.62-2(d)(3)(i). This is
true even if an employee actually incurs a deductible expense in connection
with employment with the employer.
IRS says that while the presence of wage recharacterization
is based on the totality of facts and circumstances, it generally is present
when the employer structures compensation so that an employee receives the same
or a substantially similar amount whether or not he has incurred deductible
business expenses related to the employer's business. Wage recharacterization
may occur in different situations.
For example, IRS says an employer recharacterizes wages if:
It temporarily reduces taxable wages, substituting the
reduction in wages with a payment that is treated as a nontaxable reimbursement
and then, after total expenses have been reimbursed, increases taxable wages to
the prior wage level.
It pays a higher amount as wages to an employee only when he
does not receive an amount treated as nontaxable reimbursement and pays a lower
amount as wages to an employee only when he also receives an amount treated as
nontaxable reimbursement.
It routinely pays an amount treated as a nontaxable
reimbursement to an employee who has not incurred bona fide business expenses.
Rev Rul 2012-25, illustrates the wage recharacterization by
way of four detailed situations.
Situation (1). Corp A pays its service technicians on an
hourly basis, taking into account the fact that they must provide their own
tools and equipment. A decides to begin reimbursing its technicians for their
tool and equipment expenses through a tool reimbursement arrangement (tool
plan). Under the tool plan, a technician provides Corp A with an amount
equivalent to his tool and equipment expenses incurred in connection with
providing services to Corp A. Corp A takes the technician's total expenses for
the year and divides the total amount by the number of hours he is expected to
work over the course of a year to arrive at an hourly tool rate. Corp A pays
the technician a reduced hourly compensation rate, which is treats as taxable
wages, and an hourly tool rate, which it treats as a nontaxable reimbursement.
The hourly tool rate plus the reduced hourly compensation rate approximately
equal the pre-tool plan compensation rate. The tool plan tracks the hourly tool
rate up to the amount of substantiated tool and equipment expenses. Once a
technician has received tool plan payments for the total amount of his tool and
equipment expenses, Corp A stops paying him an hourly tool rate but increases
his hourly compensation to the pre-tool plan hourly compensation rate.
IRS concludes that Corp A's tool plan isn't an accountable
plan because Corp A pays the same gross amount to a technician regardless of
whether he incurs (or is reasonably expected to incur) expenses related to Corp
A's business. The purported tool reimbursements are merely a recharacterization
of wages because approximately the same amount is paid in all circumstances.
The fact that a technician actually incurs a deductible expense in connection
with employment does not cure the incidence of wage recharacterization.
In Rev Proc 2002-41,
2002-1 CB 1098, the IRS OK'd a deemed
substantiation method for pipeline industry workers that make rig
reimbursements to employees . And in Notice 2005-59, 2005-2 CB 443, IRS issued
provided the criteria it would consider in an Industry Issue Resolution (IIR)
Program to give employers accountable-plan relief when making tool allowances
.
Situation (2). Employer B, a staffing contractor, hires
nurses and provides their services to hospitals throughout the country for
short-term assignments. All nurses are paid on an hourly basis that's the same
regardless of the hospital location. When nurses are assigned to hospitals that
require them to travel away from their tax home and incur deductible expenses
in connection with Employer B's business, Employer B treats part their hourly
compensation as a nontaxable per diem allowance for lodging, meals, and
incidental expenses under a per diem plan. The remaining portion of the nurses'
hourly compensation is treated as taxable wages. When nurses are assigned to
hospitals within commuting distance, Employer B treats all of their
compensation as taxable wages. In each case, the nurses receive the same total
compensation per hour.
IRS concludes that Employer B's per diem plan isn't an
accountable plan. It does not satisfy the business connection requirement
because Employer B pays the same gross amount to nurses regardless of whether
they incur (or are reasonably expected to incur) travel expenses related to
Employer B's business. The purported per diem payments are merely recharacterized
wages because nurses receive the same gross compensation per hour regardless of
whether travel expenses are incurred (or are reasonably expected to be
incurred). The fact that nurses traveling away from their tax home actually
incur a deductible expense in connection with employment does not cure the
incidence of wage recharacterization.
Situation (3). Builder C employs workers to build commercial
buildings throughout a major metropolitan area. Some of them are required to
travel between construction sites or otherwise use their personal vehicles for
business purposes. Builder C compensates all workers for their services on an
hourly basis, which it treats as taxable wages. Builder C also pays all of its
workers, including those who are not required to travel or otherwise use their
personal vehicles for its business, a flat amount per pay period that it treats
as a nontaxable mileage reimbursement.
IRS concludes that Builder C's mileage reimbursement plan
isn't an accountable plan. It fails the business connection requirement because
it routinely pays an amount as a mileage reimbursement to workers who have not
incurred (and are not reasonably expected to incur) deductible business
expenses in connection with Builder C's business. Amounts paid under the plan
are merely recharacterized wages because all workers receive an amount as a
mileage reimbursement regardless of whether they incur (or are reasonably
expected to incur) mileage expenses.
Situation (4). Corp D, a cleaning services company, employs
cleaners who are required to provide the cleaning products and equipment
necessary to complete the jobs to which they are assigned. Their hourly pay
takes into account the fact that employees must provide their own cleaning
products and equipment. Corp D decides to begin reimbursing its employees for
their cleaning and equipment expenses. It prospectively alters the compensation
structure by reducing the hourly compensation paid to all employees. Under Corp
D's new reimbursement arrangement, employees who substantiate to D the actual
amount of their work-related cleaning products and equipment are reimbursed for
their expenses. Any reimbursement paid under the reimbursement arrangement is
paid in addition to the hourly compensation paid for the employees' services.
Those employees who don't incur job-related expenses or don't properly
substantiate them continue to receive the lower hourly compensation, don't
receive any reimbursement, and aren't compensated in another way (for example,
with a bonus) to substitute for the reduction in the hourly compensation.
IRS concludes that the reimbursements for cleaning and
equipment expenses are nontaxable reimbursements paid under an accountable
plan. Corp D's plan only reimburses employees when a deductible business expense
has been incurred in connection with job-related services and the reimbursement
is not in lieu of wages that the employees would otherwise receive. IRS
stressed that although Corp D reduced the amount of compensation it pays all of
its employees, the reduction is a substantive change in compensation structure.
Reimbursement amounts are not guaranteed and employees who do not incur
expenses in connection with Corp D's business, or who do not properly
substantiate the expenses, continue to receive the reduced hourly compensation
amount.
Rev. Rul. 2012-25, 2012-37 IRB 337, , IRC Sec(s).
Headnote:
Wage recharacterization. This ruling provides guidance for
employers under section 62(c) of the Code and the applicable regulations. The
ruling clarifies that an arrangement that recharacterizes taxable wages as
nontaxable reimbursements or allowances does not satisfy the business
connection requirement of the accountable plan rules under section 62(c) and
the applicable regulations. Specifically, this ruling includes four situations.
Three of the situations illustrate arrangements that impermissibly recharacterize
wages, such that the arrangements are not accountable plans. The fourth
situation illustrates an arrangement that does not impermissibly recharacterize
wages, where an employer prospectively alters its compensation structure to
include a reimbursement arrangement.
Reference(s):
Full Text:
Rev. Rul. 2012-25
ISSUE
Whether an arrangement that recharacterizes taxable wages as
nontaxable reimbursements or allowances satisfies the business connection
requirement of the accountable plan rules under
§ 62(c) and the applicable regulations.
FACTS
Situation 1.
Employer A, a company contracting with cable providers,
employs technicians to install cable television systems at residential
locations on behalf of different cable providers. Employee technicians are
required to provide the tools and equipment necessary to complete the various
installation jobs to which they are assigned.
Employer A compensates its employees on an hourly basis,
which takes into account the fact that technicians are required to provide
their own tools and equipment. Employer A decides to begin reimbursing its
technicians for their tool and equipment expenses through a tool reimbursement
arrangement (tool plan).
Under Employer A's tool plan, a technician provides Employer
A with an amount equivalent to the technician's tool and equipment expenses incurred
in connection with providing services to Employer
A. Employer A takes the technician's total expenses for the
year and divides the total amount by the number of hours a technician is
expected to work over the course of a year to arrive at an hourly tool rate.
Once Employer A has determined the hourly tool rate amount for a technician, it
pays the technician a reduced hourly compensation rate and an hourly tool rate.
Employer A treats the reduced hourly compensation as taxable wages. Employer A
treats the hourly tool rate as a nontaxable reimbursement. The hourly tool rate
plus the reduced hourly com- pensation rate approximately equal the pre-tool
plan compensation rate. The tool plan tracks the hourly tool rate up to the
amount of substantiated tool and equipment expenses. Once a technician has
received tool plan payments for the total amount of his or her tool and
equipment expenses, Employer A ceases paying the technician an hourly tool rate
but increases the technician's hourly compensation to the pre-tool plan hourly
compensation rate.
Situation 2.
Employer B, a staffing contractor, employs nurses and
provides their services to hospitals throughout the country for short-term
assignments. Employer B compensates all of the nurses on an hourly basis and
the hourly compensation amount does not vary depending on whether the hospital
is located away from the assigned nurse's tax home.
When Employer B sends nurses on assignment to hospitals that
require them to travel away from their tax home and incur deductible expenses
in connection with Employer B's business, Employer B treats a portion of the
nurses' hourly compensation as a nontaxable per diem allowance for lodging,
meals, and incidental expenses under Employer B's per diem plan; Employer B
treats the remaining portion of the nurses' hourly compensation as taxable
wages. When Employer B sends the nurses on assignment to hospitals within
commuting distance of their tax home, Employer B treats all of the nurses'
compensation as taxable wages. In each case, the nurses receive the same total
compensation per hour.
Situation3.
Employer C, a construction firm, employs workers to build
commercial buildings throughout a major metropolitan area. As part of their
duties, some of Employer C's workers are required to travel between
construction sites or otherwise use their personal vehicles for business
purposes. These workers incur deductible business expenses in operating their
personal vehicles in connection with their employment with Employer C. Employer
C compensates all of its workers for their services on an hourly basis, which
Employer C treats as taxable wages. Employer C also pays all of its workers,
including those who are not required to travel or otherwise use their personal
vehicles for Employer C's business, a flat amount per pay period that Employer
C treats as a nontaxable mileage reimbursement.
Situation 4.
Employer D, a cleaning services company, employs cleaning
professionals to perform house cleaning services for Employer D's clients.
Employee cleaning professionals are required to provide the cleaning products
and equipment necessary to complete the cleaning service jobs to which they are
assigned.
Employer D compensates its employees on an hourly basis,
which takes into account that employees are required to provide their own
cleaning products and equipment. Employer D decides to begin reimbursing its employees
for their cleaning and equipment expenses through a reimbursement arrangement.
Employer D prospectively alters its compensation structure
by reducing the hourly compensation paid to all employees. Under Employer D's
new reimbursement arrangement, employees can substantiate to Employer D the
actual amount of deductible expenses incurred in purchasing their cleaning
products and equipment in connection with performing services for Employer D.
Employer D reimburses its employees for substantiated expenses incurred in
performing services for Employer D. Any reimbursement paid under Employer D's
reimbursement arrangement is paid in addition to the hourly compensation paid
for the employees' services. Employees who do not incur expenses for cleaning
products and equipment in connection with their jobs for EmployerD, or who do
not properly substantiate such expenses to Employer D, continue to receive the
lower hourly compensation and do not receive any reimbursement and are not
compensated in another way (for example, with a bonus) to substitute for the
reduction in the hourly compensation. Employer D treats the hourly compensation
as taxable wages. Employer D treats reimbursements for cleaning and equipment
expenses as nontaxable reimbursements.
LAW AND ANALYSIS
Section 61 of the Internal Revenue Code (Code) defines gross
income as all income from whatever source derived. Section 62(a) defines
adjusted gross income as gross income minus certain deductions. Section
62(a)(2)(A) provides that, for purposes of determining adjusted gross income,
an employee may deduct certain business expenses paid by the employee in
connection with the performance of services as an employee of the employer
under a reimbursement or other expense allowance arrangement. Section 62(c) provides that, for purposes of
§ 62(a)(2)(A), an arrangement will not be treated as a reimbursement or other
expense allowance arrangement if (1) the arrangement does not require the
employee to substantiate the expenses covered by the arrangement to the person
providing the reimbursement, or (2) the arrangement provides the employee the
right to retain any amount in excess of the substantiated expenses covered
under the arrangement.
Under section 1.62-2(c) of the Income Tax Regulations, if a
reimbursement or other expense allowance arrangement meets the requirements of
business connection, substantiation, and returning amounts in excess of
substantiated expenses, all amounts paid under the arrangement are treated as
paid under an accountable plan. Amounts treated as paid under an accountable
plan are excluded from an employee's gross income, are exempt from withholding
and payment of employment taxes, and are not reported as wages on the
employee's Form W-2. If the arrangement fails any one of these requirements,
amounts paid under the arrangement are treated as paid under a non accountable
plan, must be included in the employee's gross income for the taxable year, are
subject to withholding and payment of employment taxes, and must be reported as
wages or other compensation on the employee's Form W-2.
Section 1.62-2(d)(1) provides that an arrangement satisfies
the business connection requirement if it provides advances, allowances, or
reimbursements only for business expenses that are allowable as deductions by
part VI, subchapter B, chapter 1 of the Code, and that are paid or incurred by
the employee in connection with the performance of services as an employee of
the employer. Thus, not only must an employee actually pay or incur a
deductible business expense, but the expense must arise in connection with the
employment for that employer.
Section 1.62-2(d)(3)(i) provides that the business
connection requirement will not be satisfied if a payor pays an amount to an
employee regardless of whether the employee incurs or is reasonably expected to
incur deductible business expenses. Failure to meet this reimbursement
requirement of business connection is referred to as wage recharacterization
because the amount being paid is not an expense reimbursement but rather a
substitute for an amount that would otherwise be paid as wages.
Section 1.62-2(j) Example 1 provides an illustration of a
case in which the reimbursement requirement is not satisfied.
In this example, Employer S pays its engineers $200 a day. On
those days that an engineer travels away from home on business for Employer S,
Employer S designates $50 of the $200 as paid to reimburse the engineer's
travel expenses. On all other days, the engineer receives the full $200 as
taxable wages. Because Employer S would pay an engineer $200 a day regardless
of whether the engineer was traveling away from home, the $50 Employer S
redesignates as travel expense reimbursement on days the engineer is away from
home on business is not a reimbursement and the arrangement does not satisfy
the reimbursement requirement of § 1.62-2(d)(3)(i). Thus, no part of the $50
Employer S designated as a reimbursement is treated as paid under an
accountable plan. Rather, all payments under the arrangement are treated as
paid under a nonaccountable plan. Employer S must report the entire $200 as
wages or other compensation on the employees' Forms W-2, and must withhold and
pay employment taxes on the entire $200 when paid.
Section 1.62-2(j) Example 3 also illustrates a failure to satisfy
the reimbursement requirement. In this example, Corporation R pays all its
salespersons a salary. Corporation R also pays a travel allowance under an
arrangement that otherwise meets the requirements of business connection,
substantiation, and returning amounts in excess of substantiated expenses. The
allowance is paid to all salespersons, including salespersons that Corporation
R knows, or has reason to know, do not travel away from their offices on
Corporation R business and would not be reasonably expected to incur travel
expenses. Because the allowance is not paid only to those employees who incur
(or are reasonably expected to incur) expenses of the type described in § 1.62-2(d)(1) or (d)(2), the arrangement
does not satisfy the reimbursement requirement of § 1.62-2(d)(3)(i). Thus, no part of the
allowance Corporation R designated as a reimbursement is treated as paid under
an accountable plan. Rather, all payments under the arrangement are treated as
paid under a nonaccountable plan. Corporation R must report all payments under
the arrangement as wages or other compensation on the employees' Forms W-2 and
must withhold and pay employment taxes on the payments when paid.
In Rev. Rul. 2004-1, 2004-1 C.B. 325, drivers of a courier
company were paid a mileage allowance for local transportation expenses. In
situation 1 of the ruling, the employer paid the couriers a commission equal to
X percent of the per package charge (based on location, time of day, type of
service, mileage between pickup and delivery, and other factors), known as the
tag rate, and a mileage allowance equal to Y percent of the tag rate. In
situation 2, the employer paid the couriers a commission equal to Z percent of
the tag rate reduced by a mileage allowance equal to the number of miles
traveled multiplied by the standard mileage rate. The revenue ruling concludes
that the reimbursement arrangement in situation 1, which pays a mileage
allowance as a fixed percentage of the tag rate, meets the business connection
requirement. In contrast, the revenue ruling concludes that the reimbursement
arrangement in situation 2, which subtracts a mileage allowance (calculated at
the standard business mileage rate) from the driver's set commission rate and
treats only the remaining commission as wages, fails the business connection
requirement. The variable allocation between commission and mileage allowance
in situation 2 ensures that each driver always receives the same gross amount
regardless of the amount of deductible employee business expenses incurred by
the courier by varying the amount treated as wages in light of the mileage
allowance paid. Accordingly, the arrangement effectively recharacterizes
amounts otherwise payable as a taxable commission as a non-taxable mileage
allowance. The ruling provides that a bona fidereimbursement arrangement must
preclude the recharacterization as a mileage allowance of amounts otherwise
payable as commission. See Shotgun Delivery v. United States, 269 F.3d 969 [88
AFTR 2d 2001-6391] (9th Cir. 2001) (holding that a plan guaranteeing that
employee drivers always received 40% of the tag rate with a variable allocation
between taxable wages and nontaxable mileage reimbursement was nonaccountable,
and noting that “the evidence suggests that the plan's primary purpose was to
treat the least amount possible of the driver's commission as taxable wages”).
The legislative history of § 62(c) indicates that a taxpayer
should not be able to recharacterize an amount that would have been paid as
wages as a nontaxable reimbursement in order to avoid the two-percent of
adjusted gross income limitation (two-percent floor), enacted by the Tax Reform
Act of 1986, for deducting most employee business expenses. Specifically, the
Tax Reform Act of 1986 significantly changed rules for deduction of employee
business expenses by converting most of these expenses into itemized deductions
that an employee could only deduct if the aggregate of such expenses exceeded
the two-percent floor. However, the 1986 Act left in place the ability of a
taxpayer to deduct from gross income and without regard to the two-percent
floor, pursuant to § 62(a)(2)(A), employee business expenses incurred by a
taxpayer as part of a reimbursement or other expense allowance arrangement with
his or her employer. After enactment of the 1986 Act, tax practitioners
proposed that employers could use reimbursement and expense allowance
arrangements to (1) eliminate the effect of the two-percent floor on deductible
employee expenses, and (2) save both employer and employee employment taxes by
restructuring their compensation packages to convert a portion of an employee's
compensation into a nontaxable reimbursement. This restructuring would permit
employers to pay a lesser total amount while increasing employees' after-tax
compensation.
Congress responded by enacting § 62(c) in § 702 of the Family Support Act of 1988, 100
P.L. 485, 102 Stat. 2343 (1988). In describing the conference agreement, the
House-Senate Conference Committee Report on that Act states that “[i]f an
above-the-line deduction is allowed for expenses incurred pursuant to a
nonaccountable plan, the two-percent floor enacted in the [Tax Reform Act of
1986] could be circumvented solely by restructuring the form of the employee's
compensation so that the salary amount is decreased, but the employee receives
an equivalent nonaccountable expense allowance.” H.R. Rep. No. 100-998, at 203,
100th Cong., 2nd Sess. (Sept. 28, 1988). Section 62(c) was enacted to prevent
such restructuring of compensation arrangements and permit an above-the-line
deduction only for expenses reimbursed under what legislative history referred
to as an accountable plan.
Consistent with legislative history, thepreambletoTreasury
Decision 8324, 55 FR 51688, 1991-1 C.B. 20, 21 (1990), states:
Some practitioners have asked whether a portion of an
employee's salary may be recharacterized as being paid under a reimbursement arrangement.
The final regulations clarify that if a payor arranges to payanamounttoanem-
ployee regardless of whether the employee incurs (or is reasonably expected to
incur) deductible business expenses or other bona fide expenses related to the
employer's business that are not deductible, the arrangement does not meet the
business connection requirement of §
1.62-2(d) of the regulations and all amounts paid unde the arrangement are
treated as paid under a nonaccountable plan.... Thus, no part of an employee's
salary may be recharacterized as being paid under a reimbursement arrangement
or other expense allowance arrangement. While an employer may establish or
modify its compensation structure to include nontaxable reimbursement under an
accountable plan, recharacterizing as nontaxable reimbursements amounts that
would otherwise be paid as wages violates the business connection requirement
of § 1.62-2(d), and more specifically the reimbursement requirement of § 1.62-2(d)(3)(i). This is true even if an
employee actually incurs a deductible expense in connection with employment
with the employer.
The presence of wage recharacterization is based on the
totality of facts and circumstances. Generally, wage recharacterization is
present when the employer structures compensation so that the employee receives
the same or a substantially similar amount whether or not the employee has
incurred deductible business expenses related to the employer's business. Wage
recharacterization may occur in different situations. For example, an employer
recharacterizes wages if it temporarily reduces taxable wages, substituting the
reduction in wages with a payment that is treated as a nontaxable reimbursement
and then, after total expenses have been reimbursed, increases taxable wages to
the prior wage level. Similarly, an employer recharacterizes wages if it pays a
higher amount as wages to an employee only when the employee does not receive
an amount treated as nontaxable reimbursement and pays a lower amount as
wagestoanemployeeonlywhenthe employee also receives an amount treated as
nontaxable reimbursement. An employer also recharacterizes wages if it
routinely pays an amount treated as a nontaxable reimbursement to an employee
who has not incurred bona fide business expenses.
HOLDINGS
Situation 1.
Employer A's tool plan does not satisfy the business
connection requirement of the accountable plan rules because the employer pays
the same gross amount to a technician regardless of whether the technician
incurs (or is reasonably expected to incur) expenses related to Employer A's
business. Specifically, Employer A's tool plan ensures that a technician
receives approximately the same gross hourly amount by substituting a portion
of what was paid as taxable wages with a tool rate amount that is treated as
nontaxable reimbursement, and then increasing the wages again once all tool
expenses have been reimbursed. Accordingly, the purported tool re- imbursements
are merely a recharacterization of wages because approximately the same amount
is paid in all circumstances. The fact that a technician actually incurs a
deductible expense in connection with employment does not cure the incidence of
wage recharacterization. The arrangement fails to satisfy the business
connection requirement of § 1.62-2(d). Therefore, without regard to whether it
meets the other requirements of an accountable plan as set forth in § 1.62-2,
Employer A's tool plan is not an accountable plan under § 62(c) and the
applicable regulations.
Situation 2.
Employer B's per diem plan does not satisfy the business
connection requirement of the accountable plan rules because Employer B pays
the same gross amount to nurses regardless of whether the nurses incur (or are
reasonably expected to incur) travel expenses related to Employer B's business.
Specifically, Employer B pays the same gross compensation to nurses, but a
portion of the hourly compensation is treated as nontaxable per diem when a
nurse is traveling away from his or her tax home on assignment. For nurses
traveling away from their tax home on assignment, Employer B reduces the amount
of the nurses' compensation treated as taxable wages and treats an amount equal
to the reduction in compensation as a nontaxable per diem. For nurses assigned
to hospitals within commuting distanc of their tax homes, Employer B treats all
compensation as taxable wages. Accordingly, the purported per diempayments are
merely recharacterized wages because nurses receive the same gross compensation
per hour regardless of whether travel expenses are incurred (or are reasonably
expected to be incurred). The fact that a nurse traveling away from his or her
tax home actually incurs a deductible expense in connection with employment
does not cure the incidence of wage recharacterization. The arrangement fails
to satisfy the business connection requirement of § 1.62-2(d). Therefore,
without regard to whether it meets the other requirements of an accountable
plan as set forth in § 1.62-2, Employer B's per diem plan is not an accountable
plan under § 62 and the applicable regulations.
Situation 3.
Employer C's mileage reimbursement plan does not satisfy the
business connection requirement of the accountable plan rules because it
operates to routinely pay an amount as a mileage reimbursement to workers who
have not incurred (and are not reasonably expected to incur) deductible
business expenses in connection with Employer C's business. The purported
mileage reimbursement is merely recharacterized wages because all workers
receive an amount as a mileage reimbursement regardless of whether they incur
(or are reasonably expected to incur) mileage expenses. The arrangement fails
to satisfy the business connection requirement of § 1.62-2(d). Therefore,
without regard to whether it meets the other requirements of an accountable
plan as set forth in § 1.62-2, Employer C's mileage reimbursement plan is not
an accountable plan under § 62(c) and the applicable regulations.
Situation 4.
Employer D's reimbursement arrangement satisfies the
business connection requirement of the accountable plan rules. Employer D's
plan only reimburses employees when a deductible business expense has been
incurred in connection with performing services for Employer D and the
reimbursement is not in lieu of wages that the employees would otherwise
receive. Although Employer D has reduced the amount of compensation it pays all
of its employees, the reduction in compensation is a substantive change in
Employer D's compensation structure. Under Employer D's arrangement,
reimbursement amounts are not guaranteed and employees who do not incur
expenses in connection with Employer D's business, or who do not properly
substantiate such expenses, continue to receive the reduced hourly compensation
amount. These employees do not receive any reimbursement and are not
compensated in another way to make up for the reduction in the hourly
compensation. Employer D's reimbursement arrangement does not operate to pay
the same or a substantially similar gross amount to an employee regardless of
whether the employee incurs (or is reasonably expected to incur) expenses
related to Employer D's business. The reimbursement is paid in addition to the
employees' wages rather than as a substitute for wages that would otherwise be
paid. Accordingly, Employer D's reimbursement arrangement satisfies the
business connection requirement of § 1.62-2(d). Therefore, as long as the
substantiation and return of excess amounts requirements are also met, Employer
D's reimbursement arrangement is an accountable plan under § 62(c) and the
applicable regulations.
DRAFTING INFORMATION
The principal author of this revenue ruling is Kelly
Morrison-Lee of the Office of Division Counsel/Associate Chief Counsel (Tax
Exempt & Government Entities). For further information regarding this
revenue ruling, contact Kelly Morrison-Lee at (202) 622-0047 (not a toll-free
call).
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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