Reimbursement is the act of businesses paying back employees, customers, or other parties for out-of-pocket expenses on behalf of the organization. Typically, people think of travel when it comes to reimbursement. In reality, there are several forms of reimbursement, including, but not limited to: education, medical, and other industry-specific reimbursements.
Often, organizations will also cover insurance costs and overpaid taxes to meet qualifications for tax-deductible expenses. According to the IRS, tax-deductible expenses must comply with the definition of an “accountable plan” and adhere to several other requirements.
3 types of expense reimbursement
Many employees sign up for continuing education classes at the encouragement of their boss. These classes are usually expensive and are exclusively meant to help employees improve their professional skill set. In these cases, companies will often reimburse the class fee.
Travel reimbursement is most often thought of when using the word “reimbursement”. On business trips, employees are paid per diem rates to pay for hotels, food, and transportation. Travel reimbursement can get expensive, so businesses enact policies to restrict employees to a range of airfare, hotel, and meal prices that they deem appropriate.
Many businesses grant medical insurance to their employees. Health insurance can be bestowed in the form of: Health Savings Accounts (HSA), Health Reimbursement Accounts (HRS), Flexible Spending Accounts (FSA), or simply a taxable stipend for health insurance. The tax benefits of each account or stipend vary, but each reimburses employees for health premiums and other qualified medical expenses.
Specifically, HSAs are employee-owned bank accounts that allow for tax-free medical expense reimbursement. Companies contribute an amount to employees’ HSAs at the beginning of the year or throughout the year. In addition, employees can contribute to their HSA account, tax-free. When a health issue or expense arises, employees can disburse HSA money to pay for health expenses. If employees do not use their account throughout the year, the balance carries over to cover medical costs in the following year.
Health insurance is a classic example of reimbursement. After a hospital or doctor’s visits, patients are billed for all charges including ambulance services, consultations, x-rays, and medication. Luckily, health insurance will pay you back for a portion of your healthcare expenses.
Setting reimbursement requirements
By adding company-specific factors to those rates, businesses can make travel reimbursement policies accurate and easier to track. For accounting purposes, some businesses choose to give employees a flat per diem rate they can spend at their will. Other businesses offer executives who entertain clients a higher reimbursement budget than employees who travel but may not interact with customers directly.
Automating expense reimbursement can give you and your financial team huge peace of mind. Besides saving time (and money), expense management automation lessens human error, thereby lowering the chances of future legal trouble. In addition, reimbursement automation gives your resources time back to focus on other priorities.
According to the IRS, tax-deductible expenses must comply with the definition of an “accountable plan” and adhere to several other requirements.