What is the process for setting a company-wide employee travel per diem policy?

To set a company-wide employee travel per diem policy that is compliant with federal tax law, an employer must follow a process that ensures the policy meets the requirements for an "accountable plan" under the Internal Revenue Code and Treasury Regulations. This process involves several key steps and considerations, as detailed below:

1. Define the Purpose and Scope of the Per Diem Policy

• Purpose: The policy should be designed to reimburse employees for ordinary and necessary business expenses incurred while traveling away from home for work purposes.
• Scope: Specify which employees and types of travel are covered (e.g., domestic, international, transportation industry, etc.) and what expenses are included (lodging, meals, incidental expenses).

2. Choose the Per Diem Rates

• Federal Per Diem Rates: The IRS allows employers to use the federal per diem rates published by the General Services Administration (GSA) for the continental U.S. (CONUS), and by the Department of Defense or State Department for non-CONUS and foreign travel. These rates are locality-specific and updated annually.
• Special Rates for Transportation Industry: For employees in the transportation industry, special federal M&IE (meals and incidental expenses) rates may be used (e.g., $32 for CONUS, $36 for OCONUS, as per Rev. Proc. 93-21).
• High-Low Substantiation Method: Employers may use the high-low method, which sets a single high rate for certain high-cost localities and a lower rate for all others.
• Flat Rate or Stated Schedule: The policy may use a flat daily rate or another stated schedule, provided it is applied uniformly and objectively.

3. Ensure the Policy Meets Accountable Plan Requirements

To be an accountable plan under Treas. Reg. § 1.62-2, the policy must satisfy three requirements:

a. Business Connection

• The per diem must be paid only for business expenses that are deductible under IRC § 162 and incurred in connection with the performance of services as an employee.
• Payments must not be made for non-deductible expenses (e.g., travel that is not "away from home" as defined by IRC § 162(a)(2)).

b. Substantiation

• The policy must require employees to substantiate the time, place, and business purpose of the travel within a reasonable period of time.
• If using per diem rates, the amount is deemed substantiated, but employees must still provide records of the date, location, and business purpose of the travel.

c. Return of Excess Amounts

• If the per diem paid exceeds the federal rate, the policy must require employees to return the excess within a reasonable period of time.
• If the policy does not require return of excess, the excess is treated as paid under a nonaccountable plan and must be included in the employee’s wages.

4. Set Procedures for Substantiation and Return of Excess

• Reasonable Period: Safe harbors are provided (e.g., substantiation within 60 days, return of excess within 120 days).
• Periodic Statements: Employers may provide periodic statements (at least quarterly) to employees regarding outstanding advances or unsubstantiated expenses.

5. Address Special Situations

• Meals Provided in Kind: If the employer provides meals, the per diem must be reduced unless the employer has a reasonable belief that the employee will still incur meal expenses.
• Partial Days: The policy should specify how per diem is prorated for partial days of travel, using a reasonable and consistent method.

6. Document and Communicate the Policy

• The policy should be written and distributed to all affected employees.
• It should clearly state the rates, substantiation requirements, procedures for returning excess, and consequences for noncompliance.

7. Monitor and Enforce Compliance

• Regularly review expense reports and substantiation to ensure compliance.
• If a pattern of abuse is detected (e.g., routinely paying excess per diem without substantiation or return), all payments may be treated as made under a nonaccountable plan and become taxable.

8. Reporting and Tax Withholding

• Amounts paid under an accountable plan are not included in the employee’s gross income, are not reported as wages on Form W-2, and are not subject to employment tax withholding.
• Amounts paid under a nonaccountable plan (or excess per diem not returned) must be included in wages, reported on Form W-2, and are subject to withholding.

9. Summary of Steps

‍1. Define the scope and purpose of the per diem policy.

2. Select appropriate per diem rates (federal, high-low, or industry-specific).

3. Ensure the policy meets the accountable plan requirements (business connection, substantiation, return of excess).

4. Establish clear procedures for substantiation and return of excess.

5. Address special cases (meals in kind, partial days).

6. Document and communicate the policy to employees.

7. Monitor compliance and enforce the policy.

8. Ensure proper tax reporting and withholding.

By following these steps and aligning the policy with the requirements of IRC § 62, Treas. Reg. § 1.62-2, and relevant IRS guidance, an employer can implement a compliant and efficient company-wide per diem policy for employee travel.