Accountable Plan

An accountable plan is an employer reimbursement arrangement that meets the requirements of IRC §62(c) and Treas. Reg. §1.62-2 — and therefore lets the employer reimburse business expenses to a W-2 employee without the reimbursement being treated as taxable wages.

The three requirements (Treas. Reg. §1.62-2(d)–(f)):

1. Business connection. The expenses must be reimbursable as ordinary and necessary business expenses incurred by the employee in performing services as an employee.
2. Substantiation within a reasonable period. The employee must substantiate amount, time, place, and business purpose (the same §274(d) elements that govern the underlying deduction) within 60 days after the expense is paid or incurred (the regulatory safe harbor).
3. Return of excess within a reasonable period. Any advance or reimbursement in excess of substantiated expenses must be returned to the employer within 120 days after the expense is paid or incurred (the safe harbor).

If all three are met, reimbursements are excluded from the employee’s W-2 wages, are not subject to FICA, and are not subject to federal income tax withholding.

Why it matters more than ever in 2026. Under pre-TCJA law, a W-2 employee whose employer did not reimburse business mileage could deduct it as a miscellaneous itemized deduction subject to the 2%-of-AGI floor. The TCJA suspended that deduction; OBBBA §70110 made the suspension permanent. So for a W-2 employee in 2026, an accountable plan is no longer the “nice” way to get mileage paid — it is the only way to receive mileage money tax-free. A flat car allowance with no substantiation requirement is a non-accountable plan, fully taxable as wages on the W-2, subject to FICA, and not deductible by the employee.

Worked example. James is an outside sales rep covering Northern California for a wholesale distributor. He drives 24,000 business miles in 2026.

• Under an accountable plan at the IRS rate: 24,000 × $0.725 = $17,400 reimbursed tax-free, no W-2 inclusion, no FICA. The employer deducts the $17,400 as a business expense.
• Under a non-accountable flat $400/month car allowance: 12 × $400 = $4,800 added to his W-2 wages, ~$734 in additional FICA (employer + employee combined), and James gets no deduction because OBBBA §70110 killed it.

Same money, dramatically different tax outcome. The fix is procedural: substantiate within 60 days, return excess within 120, and document the plan.