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IRS Reconsiders Whether Expense Arrangements Qualify as Accountable Plans

(Sept. 19) - Employers should not look to a 1999 IRS private letter ruling (PLR) for guidance on whether a compensation arrangement that permits each employee to reduce his or her commissions at the beginning of each year in exchange for setting up an expense reimbursement arrangement could satisfy the accountable plan rules of Code Section 62(c). This warning comes from IRS guidance released on Sept. 1 (PLR 200035012).

This recent PLR advises that the IRS is reconsidering the conclusions of a previous letter ruling (PLR 199916011, issued on Jan. 11, 1999) issued to the taxpayer, which said such an arrangement could qualify as an accountable plan under Section 62(c) if certain conditions are met. The issue under discussion is whether a prospective change in compensation arrangements violates the Section 62(c) prohibition against wage recharacterizations and cash options.

In the 1999 private letter ruling, the IRS told the employer that it could deduct reimbursements it makes to employees for business-related travel and entertainment expenses and exclude the reimbursements from the employees' income as accountable plan payments. That guidance was itself a reversal of the IRS view expressed in 1993 in PLR 9325023.

The 1993 PLR concerned an insurance company's modification of its district managers' compensation arrangements that allowed district managers to elect on an annual basis and before each calendar year began to reduce their gross compensation in exchange for the establishment of expense arrangements that would permit tax-free expense reimbursements. The IRS concluded in 1993 that with such a compensation modification, the reimbursement arrangement was not a Section 62(c) accountable plan, even though the modification would be prospective in application.

In the most recent PLR, the IRS said that it is reconsidering the circumstances under which the concurrent adoption of a salary reduction arrangement and a reimbursement or other expense allowance arrangement would be a recharacterization of wages that would violate the rules under Section 62(c). Though the IRS has not reached a final decision on the matter, the recent guidance warns that the conclusions it expressed in the 1999 PLR may no longer be relied upon.

PLRs do not have the force and effect of law, nor do they constitute official IRS guidance. Nonetheless, employers should be aware of the views the IRS expresses in PLRs since they suggest how the IRS interprets the law with regard to a specific situation and how the IRS may apply the law in similar scenarios.

More information on expense reimbursements is available in The Employer's Guide to Fringe Benefit Rules and by visiting the Thompson Publishing Group, Inc. Web site at http://www.thompson.com.

Reprinted with permission from the October 2000 supplement to The Employer's Guide to Fringe Benefit Rules, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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