Reimbursable Out-Of-Pocket Costs

What Are Reimbursable Out-Of-Pocket Costs?

Reimbursable out-of-pocket costs are things that an employee pays for upfront and then are paid back for by their company. These out-of-pocket expenses are often work-related and may be tax-deductible for employees if they are not reimbursed.

Understanding Reimbursable Out-Of-Pocket Costs

For example, if a salesperson drives to multiple locations each day to visit clients face-to-face, the amount spent on gas is a reimbursable expense. Sometimes, even wear-and-tear caused by excessive miles on a personal car being used for work will be paid back to an employee. It all depends on company policy. An employee can record the mileage and/or gas costs and submit proof to accounting for payment, or they can opt to use the deduction when filing next year’s taxes.

Reimbursable out-of-pocket costs can also occur when traveling. If part of a person’s job involves hopping on a plane and attending conferences throughout the year, expenses such as food, hotel, airfare, tips, etc., are often reimbursable. Some companies opt not to pay for alcoholic beverages; again, it’s a matter of policy.

Another situation that often requires out-of-pocket work purchases is when someone works from home, every day or a few days a week. Usually, a telecommuter walks into the local office supply store to buy items like print cartridges, paper, computer accessories, etc.. or downloads necessary applications online if a company does not provide them via a connected network and the help of IT.

Again, these costs are reimbursable unless an employee chooses to use them as deductions on next year’s taxes. When a company reimburses employees, it can deduct all costs as business expenses without impacting an individual’s taxes.

Another way companies handle expenses is by providing a corporate credit card in their name, and the balance is paid directly to the merchants.

Reimbursable Medical Expenses

For medical expenses, insurance companies often deal with doctors or service providers directly to handle payment. Still, occasionally, insurance policies will require the covered person to pay for the product or service upfront, then submit a receipt for reimbursement. In the health insurance industry, out-of-pocket expenses refer to the portion of the bill that the insurance company doesn't cover and that the individual must pay on their own. Out-of-pocket healthcare expenses include deductibles, copays, and coinsurance.

Health insurance plans have out-of-pocket maximums. These are caps on the amount of money that a policyholder can spend each year on covered healthcare expenses. The Affordable Care Act (ACA) requires all group and individual plans to stay within annually updated guidelines for out-of-pocket maximums unless otherwise exempted.

For 2021, the out-of-pocket limits are $8,550 for individual coverage and $17,100 for family coverage. While plans can't have out-of-pocket maximums that are higher than these limits, many offer lower maximums.

Employee Responsibilities

Employees should keep accurate daily records of expenses and provide receipts on forms provided either by their companies or online and turned into the accounting department on a predetermined schedule. All mileage should be logged, including odometer readings, dates, and locations. Commuting miles, however, are not reimbursable.

In many cases, it’s beneficial and easier for both parties if an employer pays for expenses ahead of time. It can save accounting time and prevent an employee from spending personal money on business when it might be a hardship.

A reimbursable out-of-pocket cost for a sales representative could be a restaurant bill from courting a potential client or the cost of gas to drive to a sales course in a neighboring city. Most companies have guidelines to help employees determine what expenses are considered reimbursable out-of-pocket costs and not. Usually, employees will have to retain receipts and give detailed explanations for their purchases.

What Is a Reimbursement Plan?

A reimbursement plan is a written set of rules and guidelines outlining an employer's reimbursement policies. This document provides employees with information on the types of work-related expenses that can be reimbursed. It explains the procedures for submitting expenses for reimbursement and describes how and when the employer will reimburse the employee.

Are Reimbursable Expenses Tax Deductible?

Employers are allowed to deduct reimbursements of certain business expenses. According to the IRS, a business expense must be both ordinary and necessary to be deductible. Ordinary expenses are accepted and common for a specific industry. Necessary expenses are appropriate and helpful for a business or trade.

How Does a Health Reimbursement Arrangement (HRA) Work?

A health reimbursement arrangement (HRA) is a group health plan paid for by an employer. Under the plan, the employer reimburses employees for their qualified medical expenses. The employee incurs the medical expense first and then applies for reimbursement from the employer.

If the medical expense is covered, the employee will be reimbursed tax-free up to a fixed dollar amount. The employer decides how much to put into the plan and establishes a fixed amount available for reimbursement to the employee per year. Some HRAs will allow unused amounts to roll over to the following year.