Per Diem vs. Accountable Plans: Determining the Best Approach

One of the most frustrating internal control processes for accountants and auditors alike is the dreaded company credit card and employee expense reimbursements.  You might be thinking, let’s just switch to per diem and the administrative headache all goes away.  I’m sorry to say, however, that it is not always the case.  So, which is better – per diem or accountable plans?  As in life, as in accounting … it depends!

Per Diem

Per Diem, generally speaking, is an allowance for lodging, meals, and incidental expenses, is generally preferred by employees.  This method does not require submission of receipts and if the employee decides to spend less in a day (say, by ordering the dollar menu at McDonalds), they can keep the remaining amount.  This approach can also be easier on the accounting department as they do not have to undertake the time-consuming task of matching receipts to charges and reviewing the detail of each receipt.

However, there are scenarios that add complexity. For example, did you know that the Internal Revenue Service (IRS) approved rates for per diem are based on location?  If your organization gives an employee a per diem worth more than the IRS rates for the location the employee is visiting, the difference is taxable income to the employee.  The approved federal rates can be found at www.gsa.gov/perdiem and can be searched by city or county.  If neither of these are listed, there is a standard rate that can be applied.  Furthermore, the per diem is broken down into two different rates: one for lodging and one for meals and incidental expenses (M&IE).  For example, in February 2023 District of Columbia lodging rate is $188 and the M&IE rate is $79.

While you may not need to match receipts, there is still a good bit of administrative work to be done with per diem and you will need to establish a process to ensure all required information is being captured.  Here are a few key things to keep in mind:

• Who is going to be responsible for looking up the IRS rate? The employee traveling, their supervisor, or the accounting staff?
• Do you plan to limit the per diem to the IRS rate or pay a higher rate and tax on the difference?
• The lodging rate is a maximum.
• There is a reduced M&IE rate for the first and last day of travel.

Accountable Plan

An accountable plan (credit card or expense reimbursement) requires employees to submit receipts to the organization after the travel costs were incurred.  There are no specific dollar thresholds using this method from either the IRS or the Department of Labor (DOL).  Keep in mind however, that expenses could still be deemed lavish or extravagant.  The key to making this plan successful is having a detailed travel/ expense reimbursement policy and enforcing it!  When establishing or revising your policies, here are a few tips:

• Itemized receipts are considered a best practice; they are required for organizations under the regulations of the DOL and expenditures covered by federal funding.
• An explanation of the business purpose should be provided as well as a list of who else was in attendance for meals.
• Be aware of specific exclusions in the policy, for example alcohol for expenditures covered by federal funding.

Depending on the overall amount of employee travel at an organization, the accountable plan approach can create a substantial administrative burden.  However, there are now several software packages available that can help.  With features such as the ability to upload and route receipts from a cell phone, these programs can tighten approval process controls and speed the time to receive supporting documents.

There are also many organizations that choose to have a combination of both per diem and an accountable plan.  If you choose that approach, keep in mind that employees traveling on per diem must subtract any meals that are otherwise provided, such as those offered as part of an attended meeting or conference.  “Double dipping” is not allowed by any regulatory body.

As we’ve seen, choosing the type of plan that is best for your organization can be a complex decision.  A good place to start is to look at the regulations that apply to your organization prior to implementing or making any changes.  It’s always a good idea to discuss proposed changes with your auditor or accounting professional before implementing them.

And remember, whether it’s per diem, accountable, or a combination, the most important part is consistent enforcement of your policy.