What are Employee Expense Reimbursements? Guide on How to Handle Reimbursements Efficiently

2. Risk Mitigation

• Establishing a reimbursement system can mitigate the risk of fraud, where employees may submit fake bills.
• Pre-approval processes, regular audits, robust internal controls, and leveraging technology can prevent fraud and mitigate risks.
• Implementing systems that provide real-time visibility into employee expenses can proactively identify potential risks.

3. Financial Accountability

• Clear reimbursement policies and real-time reporting instil fiscal accountability in employees.
• Multi-level approval systems, budgeting, and spending limits ensure responsible resource allocation.
• Streamlining expense reimbursement processes contributes to building financial accountability.

4. Audit Readiness

Given the importance of audits in the Indian regulatory environment, an expense reimbursement system helps NACs be audit-ready.

Types of Employee Expense Reimbursement

Companies must set up the right system to pay back when employees spend their money on business expenses. NACs can check and implement four significant types of employee expense reimbursement:

1. Travel and Mileage Reimbursement

Companies requiring employees to travel for work and make business trips can implement this reimbursement structure. The purpose is not to inhibit any activity that can bring more business and let the employees spend time and resources doing their jobs. 

For business meetings and work within the city, the employees claim reimbursements along the lines of the standard mileage rate, which, for road travel in India, is ₹16 per kilometre.

An effective system enables employers to anticipate and plan travel and accommodation expenses, such as air tickets and lodging, in advance, thereby minimising reimbursement efforts later.

Other incidental expenses incurred during business trips, such as cab bookings, meals, entertainment, and flight delays, should be reimbursed upon verification. While companies may provide per diem allowances for such trips, additional incidental business expenses may also exist.

Important Things While Creating the Policy:

• Clearly outline all applicable travel modes in the policy.
• Establish transparent limitations on daily allowances and set spending limits for client lunches, meals, etc.
• Consider the implications of IGST for travel within India and incorporate relevant rules into the reimbursement system.

2. Business Expenses Reimbursement

Employees paying for office supplies, meals and entertainment with business partners, buying equipment for home offices, and any other item according to the company’s policy comes under business expense. For business-related expenses, the employers have to pay them back. 

As a business expense can include many things, it's important to add the names of goods and services contained in the same. 

Indian companies can also claim input tax credit (ITC) on employee expense reimbursement. However, this rule has several complexities, which an expert can clear. To ensure a smooth experience for your employees, you can leverage the expertise of a Mysa CA who will guide you in building a compliant expense reimbursement system. 

Important Things While Creating the Policy:

• Define spending limits for employees and create an efficient submission process. 
• Share formats for sharing invoices and receipts for faster approvals. 

3. Healthcare Reimbursement

Medical or healthcare expense reimbursement is a valuable tool for NACs seeking to attract and retain top talent. Unlike established companies, NACs may not always have a healthcare policy or reimbursement system.

Companies can integrate government health insurance schemes such as Ayushman Bharat (PM-JAY) and CHGS to establish an effective reimbursement process. Leveraging these schemes, small companies can develop fully or partially reimbursable policies for healthcare expenses.

Additionally, incorporating private group health insurance for all employees, rather than offering individual policies, can enhance the employee benefits package. 

Important Things to Consider While Creating the Policy:

• Build a transparent system sharing all the relevant information with the employees.
• Implement automated solutions, ditching manual processing from the get-go to reduce the risk of fraud. 
• Integrate telemedicine and wellness programs in the policy to minimise unnecessary hospital visits and lower overall healthcare costs. 

4. Training and Development Reimbursement

NACs thrive on innovation and agility, with employers and employees collaborating to develop differentiated products and services. Employees who attend training sessions and courses to benefit the organisation will often bear the initial expenses, which the company later reimburses.

Employees undertake training on behalf of the employer with the understanding that they will apply their learning to enhance the organisation's capabilities. Additionally, NACs implement this policy to address critical skill gaps and ensure employees remain updated with industry trends.

Important Things to Consider for Building the Policy:

• Clearly define which training and development expenses qualify for reimbursement.
• Establish budget limits for employee expenses, either on an individual or departmental basis, based on the company's financials and requirements.
• Consider creating a list of pre-approved courses and programs directly aligned with the company's goals and objectives.

Are Business Expense Reimbursements Subject to Taxation?

There are two scenarios here:

1. Is the reimbursement amount received by an employee taxed?
2. Should the company paying the reimbursement amount to an employee also pay tax?

Business expense reimbursements may or may not be subject to taxation, depending on the reimbursement policy and how the company processes the reimbursements.

1. Taxation for Employees

If the employer accurately designates reimbursement expenses according to the established policy, the amount paid is not subject to taxes for the employee.

However, if reimbursements are adjusted with the employee's salary structure, they may be subject to taxes. Therefore, establishing a clear reimbursement policy is essential to ensure tax compliance.

2. Taxation for Employers

Reimbursement expenses incurred by an employer represent costs initially borne by the employee. In this context, the employee acts as an agent working on behalf of the employer.

As per an advance ruling KAR ADRG 83/2019, dated 25th September 2019), amounts paid to employees as reimbursement of expenses are not liable to tax under the provisions of the GST Act of 2017. Therefore, employers are not required to pay GST or any tax on the reimbursed amount.

From adhering to regulatory guidelines to structuring reimbursement policies and processing expense claims, implementing an accountable plan is crucial for ensuring tax compliance.

What’s an Accountable Plan for Reimbursing Employees?

An accountable plan is a structured process that complies with guidelines from the GST Act, the Income Tax Act, and the Fair Labor Standards Act (FLSA). These regulations govern establishing a fair system for reimbursing employee expenses while ensuring adherence to taxation-related procedures.

An accountable plan is designed to:

• Reimburse eligible business-related expenses incurred by employees, limited to ordinary and necessary expenses for business purposes.
• Establish a robust and user-friendly system for employees to substantiate expenses by providing evidence of the amount spent, date, place, and purpose.
• Ensure that employees promptly return any excess allowance or pre-approved expenses within a reasonable timeframe.

How to Configure an Accountable Reimbursement Plan

Digital-first NACs in India establish accountable plans for employee expense reimbursement. However, the implementation and sophistication of these plans vary based on factors such as employee strength, company size, maturity, and budget.

1. List of Reimbursable Expenses:

• Provide clarity by outlining eligible expenses in an accessible document shared with employees. This list may include business-related expenses, self-development, training, healthcare, office supplies, and other relevant areas.
• Consider sharing a list of pre-approved vendors for certain expenses (e.g., ticketing, hotel booking, office supplies) to streamline approvals and mitigate fraud risks.
• Ensure compliance with GST, the IT Act, and FLSA requirements. Establish an internal practice to update the list periodically in response to regulatory changes.

2. Timeframe for Employees to Report Expenses:

• Establish a reasonable timeframe for employees to report expenses and submit claims, typically 30 to 60 days. Adjust the time frame as needed based on organisational requirements.
• For expenses susceptible to fraud or high-value expenses where employees may require prompt reimbursement, consider setting shorter reporting deadlines to mitigate risks and alleviate financial strain.

3. Maximum Reimbursable Expenses Limit

Build a flexible system instead of setting a rigid reimbursable expenses limit to reimburse employees for the expenses. Here are a few things to consider:

1. Factors: Account for the employee level (seniority), department, expense type, and the company budget. 
2. Per-Expense Limit: Set specific limits for each category, such as food, travel, training, etc., depending on the current situation. 
3. Aggregate Limits: Set overall monthly spending limits for all employees, but after considering their seniority, department, etc. 

4. Reimbursement Amount Calculation

Transparency is paramount when determining reimbursement amounts within an accountable plan. Here's how to ensure clarity throughout the process:

• Receipts and Invoices: Require employees to submit receipts and invoices for all claims to maintain transparency and accountability.
• Documentation: Establish proper paperwork procedures for each claim, accounting for any deductions, rounding rules, and specific exclusions outlined in the reimbursement policy.

By adhering to these practices, organisations can ensure transparency and accuracy in calculating reimbursement amounts, fostering employee trust and accountability.

Best Practices to Handle Employee Expense Reimbursements

In the expense reimbursement process of structuring an accountable plan, follow these best practices to ensure a wholesome implementation: 

Automate the Process

Automation can reduce errors and improve transparency for employers and employees. Instead of manually processing the claims, automate the process for faster reimbursement and enhanced compliance.  Using the power of AI, businesses can analyse spending patterns, flag suspicious activity, and mitigate risks. Improve the impact of automation with pre-approvals, spending limits, and time limits. 

Introduce Reimbursement during Orientation

Throughout the hiring and orientation process, introduce the concept to the employees. Mention reimbursement in pre-hire documentation while creating a separate module for an accountable plan during onboarding. Give employees multiple opportunities to ask questions about reimbursement for business-related expenses and other related topics. 

How can Mysa Help with Employee Expense Reimbursement?

Mysa specialises in streamlining the reimbursement process setup and configuration for NACs. Mysa takes control of the process and automates it for your employees so that you can focus on other essential tasks. 

We can help you track, approve, and account for all employee expenses while you can also help set up an expense reimbursement system according to the requirements. Through Mysa, you can rest assured that all the employees are reimbursed on time, leading to higher satisfaction and financial transparency. 

With Mysa, founders and financial managers can be assured of timely reimbursements, experience reduced administrative burden and effective compliance. 

Contact us to learn more and set up an appointment today.