Accountable Plan for Physician Business Owners: What It Is and Why You Need It

An accountable plan is a reimbursement arrangement that allows employees to be reimbursed for out-of-pocket business expenses without those reimbursements being counted as taxable income.

Accountable plans must follow specific guidelines to qualify for favorable tax treatment. Fortunately, complying with the tax laws isn’t overly complicated. In this guide, we’ll explore what an accountable plan is, why you need one, and how it can help your medical practice keep employees happy while providing tax-saving opportunities.

What are accountable plans?

Accountable plans are reimbursement arrangements employers establish to cover business-related expenses paid for by an employee. Expenses reimbursed under an accountable plan aren’t taxable income to the employee (or business owner/employee), but the practice can claim them as deductible expenses.

For expense reimbursements to qualify as happening under an accountable plan, they must meet the following IRS criteria:

  1. Business connection. The expense must have a direct business purpose. It should be necessary, ordinary, and directly related to the employer’s business operations.
  2. Substantiation. Employees must provide adequate documentation to substantiate the expense. This includes receipts, invoices, or other records detailing the expense’s amount, date, place, and business purpose. Employees must submit this documentation within a reasonable period—typically within 60 days of incurring the cost.
  3. Return of excess amounts. Employees must return any excess reimbursement or allowance to the employer. For example, if the practice advances the physician funds for incidental business travel expenses, but their actual costs are less than the amount advanced, they must return the difference within a reasonable period—generally within 120 days after paying or incurring the expense.

Any expense reimbursement plan that doesn’t meet these requirements is a non-accountable plan. Reimbursements are income to employees and must be included in their reported wages with appropriate tax withholdings.

Why do you need an accountable plan?

Implementing an accountable plan requires some up-front and ongoing administration, but the benefits make it worthwhile.

Those benefits include:

Tax-free reimbursements

You do not have to include reimbursements made under an accountable plan in an employee’s taxable income. This benefits the employee, who keeps more of their earnings. It also benefits the practice by avoiding additional payroll taxes on these reimbursements.

Accurate expense tracking and maximized tax deductions

Accountable plans help you track and document all your business expenses by requiring detailed substantiation for each expense. This facilitates budgeting by providing a clear picture of actual business expenses.

The plan’s documentation requirements also help your business maximize tax deductions by ensuring all reimbursed expenses meet IRS requirements. This can result in significant tax savings, as legitimate, documented business expenses are fully deductible. 

Streamlined reimbursement procedures

Accountable plans establish clear guidelines and procedures for expense reimbursement, making the process more organized and efficient. Employees know exactly what kinds of expenses are reimbursable, the documentation required, and the timelines for submission. This clarity reduces confusion and your administrative burden.

Improved employee satisfaction

You can reimburse employees promptly and fairly for business-related expenses, which fosters trust and satisfaction. The plan’s clear policies reduce disputes and misunderstandings about what constitutes a reimbursable expense.

Compliance with IRS regulations

An accountable plan is one of those quirky documents required by the IRS to ensure compliance with IRS regulations, reducing the risk of audits and penalties. By following specific IRS criteria, you can confidently navigate tax reporting requirements.

How accountable plans impact tax reporting

Accountable plans significantly impact how your business handles tax reporting for reimbursed expenses and employee compensation.

As mentioned, reimbursements made under an accountable plan are not taxable income for employees or the business owner/employee. You do not have to include these amounts on W-2 forms or pay Social Security, Medicare, or unemployment taxes. This exclusion can result in substantial savings on payroll taxes and reduce the administrative workload associated with payroll processing.

You can write off expenses reimbursed under an accountable plan, provided they meet the IRS criteria for deductible business expenses. Remember, business meals are only 50% deductible, and business entertainment expenses are not deductible, even if you reimburse employees for the cost.

When you follow these rules, you are better prepared to deal with audits by the IRS or a state tax authority because you’ve followed IRS-approved guidelines for documentation and reimbursement. This compliance reduces the risk of disputes with the IRS, penalties, and interest charges associated with non-compliance.

How to implement an accountable plan

If an accountable plan sounds right for your business, here’s a step-by-step guide to help you get started.

Step 1: Draft a written policy expense reimbursement policy

Your expense reimbursement policy should clearly outline:

  • The types of expenses you will reimburse
  • The documentation required for substantiation (e.g., receipts, invoices)
  • Time frames for submitting expenses and returning excess reimbursements

Step 2: Communicate the policy to employees

Hold a meeting or send a detailed memo explaining the new reimbursement policy. Provide examples of acceptable expenses and required documentation to ensure employees understand the importance of timely and accurate submissions.

You can skip this step if the business owner/physician is the sole employee of the business.

Step 3: Set up reimbursement procedures

Establish a system for submitting expense reports. Employees may submit a written expense report and attach paper receipts. However, expense management software allows employees to submit expenses by snapping photos of receipts using a smartphone or other mobile device. These solutions can streamline expense management.

Whether employees submit expenses manually or digitally, designate a person or team responsible for reviewing and approving expenses. Create a timeline for processing and reimbursing approved expenses.

Step 4: Implement documentation and record-keeping requirements

Maintain organized records of all submitted expenses and reimbursements. Set up record retention policies to ensure you keep expense reimbursement records for a sufficient period—typically at least seven years, in case of an audit.

Step 5: Monitor and enforce compliance

Review submitted expenses regularly to ensure they meet the accountable plan criteria. Address any discrepancies or issues promptly with employees.

Periodically review your accountable plan policy to ensure it complies with current IRS regulations. Update the policy as needed to reflect changes in business operations or tax laws.

By following these steps, you can have an accountable plan that simplifies reimbursements, complies with tax laws, and benefits your organization and your employees.

Common reimbursable expenses under an accountable plan

There’s no definitive list of reimbursable expenses—these plans can cover a wide range of ordinary and necessary business-related expenses. However, to help you as you begin drafting your expense reimbursement policies, we’ve compiled some common examples of expenses that can be reimbursed through an accountable plan.

  • Travel expenses
    • Airfare
    • Hotel accommodations
    • Transportation (rental cars, taxis, ride-shares)
    • Meals and incidental expenses during business trips
  • Mileage
  • Meals
    • Client meals
  • Office supplies
    • Stationery
    • Printers and cartridges
    • Software subscriptions
  • Professional development
    • Conference fees
    • Seminars and workshops
    • Continuing education courses
  • Communication expenses
    • Business-related phone calls
    • Internet service charges
  • Home office expenses
    • A portion of utilities and rent/mortgage if the home office is used exclusively for business
  • Miscellaneous business expenses
    • Membership fees for professional organizations
    • Licensing and certification fees
    • Work-related clothing or uniforms

How physicians and medical practices can benefit from accountable plans: An example

Let’s consider a fictional example to help you better understand how an accountable plan can benefit your business.

Dr. Jane Smith runs a busy medical practice with several employees, including administrative staff and other healthcare providers. Dr. Smith implements an accountable plan for reimbursing business expenses to ensure her practice operates smoothly and complies with tax regulations.

Dr. Smith and her team frequently attend medical conferences and training sessions to stay updated on the latest advancements in their specialty. While the practice administrator books travel, accommodations, and registration fees associated with these events using a corporate credit card, they use an accountable plan to reimburse employees for meals and other incidental expenses while traveling.

The plan includes the following provisions:

  • Business connection. Dr. Smith’s practice establishes that attending conferences and training sessions is crucial for maintaining high standards of patient care and staying competitive in the healthcare industry.
  • Substantiation. Employees submit detailed expense reports, including receipts. Employees aren’t required to include receipts for incidental expenses like cash tips to luggage porters or cab drivers, but they must itemize these expenses on their expense reports to be reimbursed.
  • Return of excess amounts. If the practice advances funds for anticipated travel expenses, employees must return any excess funds promptly after the trip.

Following these rules allows Dr. Smith to reimburse employees for travel and education expenses and exclude those reimbursements from employees’ taxable income. Dr. Smith’s practice saves on payroll taxes since the reimbursements are not treated as wages. However, they can still deduct the expenses to lower their taxable income and overall tax liability.

Get help setting up your accountable plan from a trusted advisor

An accountable plan can be a powerful tool to help medical practices and other businesses manage reimbursements efficiently and optimize tax benefits. 

To take advantage of the benefits of accountable plans and ensure your business maximizes tax efficiency, schedule a free Tax Discovery Session with Cerebral Tax Advisors today. We’d be happy to help you design and implement a plan that meets your needs and complies with IRS regulations.