Accountable plan rules denied income exclusion for tool reimbursements.

• Author: Borczak, Barbara S.

In Rev. Rul. 2005-52, the IRS applied the standards of an "accountable plan" outlined in Sec. 62(a)(2)(A) and the regulations to recast an employer's expense reimbursement payments as compensation to the employee recipients. Simultaneously, the IRS issued Notice 2005-59, explaining how an Industry Issue Resolution (IIR) Program could be used to give employers relief from the accountable plan rules.

Background

In Rev. Rul. 2005-52, an employer implemented an arrangement intended to use Sec. 62(a)'s accountable plan standards to exempt from withholding and employment taxes payments made to employees as reimbursement for out-of-pocket tool expenses. The employer, an automobile repair business, required employees who worked as service technicians to provide and maintain the tools they used in performing repair and maintenance services. In addition to regular compensation, the employer paid each technician a pre-determined "tool allowance" to cover the cost of acquiring and maintaining their tools.

Tool allowances: The employer combined information derived from national statistical surveys on tool expenses incurred by automobile service technicians, with data provided by employees, to determine the average hourly expense ratio that was the basis for the tool allowance.

Each pay period, employees received their regular compensation and a reimbursement allowance payment. The employer gave each employee a quarterly statement detailing the individual's actual tool allowance paid, as well as his or her estimated tool expenses incurred during the period. The arrangement was based solely on estimated expenses; employees were not required to submit receipts or other documentation of their actual tool expenses, nor did the employer require employees to repay any excess allowance received over actual expenses incurred.

Law

Under Sec. 61, payments made by an employer to an employee as reimbursement for expenses incurred by the latter as a condition of employment, are treated as compensation unless specifically excludible under another Code provision. Sec. 62(a)(2)(A) excludes from an employee's gross income amounts paid by an employer under certain arrangements (plans) that govern the reimbursement of business expenses incurred by the employee.

Accountable plan: To qualify for the exclusion, a plan must meet three requirements set forth in Kegs. Sec. 1.62-2(c)(1), (2) and (d)-(f):

1. The reimbursed expense must be allowable as a deduction by the employer in...