What is Reimbursement?

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Definition:

A reimbursement is a payment that one party pays to another as a result of an expense that the first individual incurred on behalf of the other.

🤔 Understanding reimbursement

A reimbursement occurs anytime you cover an expense for another party, and they pay you back. Reimbursements often occur in cases of employment. Businesses will frequently reimburse employees for work-related costs. Depending on the situation, a reimbursement from your employer may be subject to income taxes, but that’s not usually the case if they’re reimbursing you for work-related expenses. Many people use the terms reimbursement and refund interchangeably. In reality, the term reimbursement applies in a situation where the expense was the other party’s responsibility in the first place. Other situations where you might frequently find reimbursements are insurance claims and divorce settlements.

Example

Suppose that Susan works for a local dentist’s office. The dentist wants to send a holiday card to each of his patients but realizes he doesn’t have any stamps. He asks Susan to run to the post office to pick some up. Susan pays for the stamps on behalf of the dentist. When she gets back to the office, the dentist pays her back for the cost. The payment is known as a reimbursement. He’s giving her money to cover her losses for an expense she paid for on his behalf.

Takeaway

A reimbursement is kind of like the payments you make to your credit card company…

When you shop with your credit card, you’re using someone else’s money to cover your expenses. Eventually you’ll have to pay them back. Paying your credit card bill is like a reimbursement. When you reimburse someone, you’re paying them back for a cost they incurred on your behalf.

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What is reimbursement?

A reimbursement is a payment that one individual or organization makes to another as a result of an expense that the first party incurred on their behalf. Reimbursements occur often in business, healthcare, or legal settings. Usually, the party paying the reimbursement was truly responsible for the cost, but the other party temporarily covered the cost.

Suppose your employer has a health insurance plan where they reimburse you for medical expenses. You visit the doctor, and your doctor’s office sends you the bill. You have to pay the bill upfront, but then you can submit the expense to your employer for reimbursement. If your employer determines it was an expense eligible for reimbursement, they’ll send you a payment.

What is the difference between reimbursement and refund?

A reimbursement is not the same as a refund. A reimbursement is a payment you receive in exchange for incurring a cost on behalf of someone else. A refund, on the other hand, is a payment that one party makes to another as a result of overpayment or returning a product.

One example of a situation where you might receive a refund is when you return an item to the store. It’s not a reimbursement — It was your responsibility to pay for the item you purchased. But because you don’t want it anymore, the store refunds your money and you give the product back.

Another example is the tax refund the Internal Revenue Service (IRS) might issue to you after you file your tax return. Throughout the year, your employer withdraws money from your paycheck to cover your income taxes. But often, you file your tax return and find out that you’ve overpaid. This overpayment might be a result of a large deduction or tax credit you claimed, or it could just be that you had the wrong amount taken out of your paychecks.

The money you get from the IRS isn’t a reimbursement — Your income taxes are your responsibility to pay, and you weren’t paying them on behalf of someone else. But you overpaid, so you get a refund.

What are the types of reimbursement?

There are three primary sources from which you might receive a reimbursement: from your employer, from your insurance provider, or from your former spouse.

  • Employer reimbursement: If you incur business-related expenses on behalf of your employer, your employer may reimburse you for those costs. In many cases, these payments are not subject to income taxes.
  • Healthcare reimbursement: In healthcare, reimbursements are payments that your insurance company or employer makes to either you or your medical provider for healthcare service you receive.
  • Spousal reimbursement: Reimbursement alimony is a type of spousal support that one individual might have to pay to a former spouse after a divorce. Usually, the purpose of alimony reimbursement is to pay back one spouse for the expenses they incurred on behalf of the other spouse.

How do reimbursements work?

Reimbursements work a bit differently depending on whether they’re coming from an employer, an insurance company, or a former spouse.

Employer reimbursement

There are often situations where someone has to cover a cost for a business-related expense. In many cases, their employer will then reimburse them for those expenses. These payments occur in one of two ways. First, your employer might give you an expense advance, which is when they supply you with money in advance to cover a cost they know you’ll pay for later.

Another reimbursement method is when you cover the cost and your employer pays you back later. In either case, the payment may or may not be taxable income for the employee depending on the employer’s reimbursement policy.

Healthcare reimbursement

Healthcare reimbursements might occur for several reasons. First, insurance companies often reimburse medical providers. In most cases, doctors don’t require payment upfront for services. Instead, they cover the costs at first, and then send your insurance company a bill. The insurance company then reimburses the medical provider.

Healthcare reimbursements can also occur if your employer reimburses you for medical expenses. Some employers offer a Health Reimbursement Arrangement (HRA), where they reimburse employees for the cost of certain medical expenses.

Spousal reimbursement

Finally, reimbursement might be a type of spousal support that a judge orders one individual to pay another. For example, suppose that two spouses, Daniel and Julia, got married right after college. Julia decided to go to medical school, and wasn’t able to work during that time. Daniel joined the workforce right away. His income paid for their living expenses, as well as some of Julia’s medical school costs.

During this time, there are plenty of other things Daniel could have spent his money on rather than helping Julia. But they both expected that they’d make a lot more money as a couple down the road.

Now suppose that around the time Julia graduates medical school and gets her first job as a doctor, she and Daniel get divorced. Julia’s income and earning potential are now both significantly higher than Daniel’s, in part because of the financial sacrifices he made while she was in school.

In this case, the judge might require Julia to pay Daniel reimbursement alimony. The purpose of these payments is to pay Daniel back for the financial loss he incurred as a result of helping Julia through medical school and now losing access to her higher income.

What is the reimbursement process?

The reimbursement process varies depending on who is reimbursing you and why. Suppose we’re talking about employer reimbursements.

First, the process starts at the very beginning with you incurring a cost on behalf of your employer. To qualify as a reimbursement under the Internal Revenue Service (IRS) requirements, the expense must be a direct result of your job.

Next, you’ll provide a receipt or documentation to your employer to prove you incurred the expense (typically within 60 days, according to the IRS). Then, once you’ve provided your employer with the necessary information and your request is approved, they’ll provide you with a payment.

The payment may or may not be subject to income taxes — It depends on your employer’s reimbursement policy. In general, if you provide documentation and return any excess payment, the reimbursement probably won’t count as taxable income.

What are the requirements for reimbursement?

Per IRS regulations, there are two types of employer reimbursement plans: accountable plans and non-accountable plans.

If an employer’s reimbursement plan is an accountable plan, then the reimbursement payments don’t count as wages, and the employee doesn’t have to pay income or payroll taxes on that money. For a reimbursement to fall under an accountable plan, it has to meet specific IRS requirements:

  • The employee must have incurred the expense as part of their job, and the reimbursement funds can’t be money they would have otherwise received as wages.
  • The employee has to provide receipts or other documentation of the expense in a timely manner (typically within 60 days).
  • If the employer gave the employee an advance payment for business expenses, the employee has to return any excess in a timely manner (according to the IRS, within 120 days of incurring the expense).

If a reimbursement policy doesn’t meet the requirements of an accountable plan, then it’s considered a non-accountable plan. According to the IRS, reimbursements fall under a non-accountable plan if:

  • The employee doesn’t have to provide receipts or other documentation.
  • The employer gives the employee money in advance to pay for business expenses, and the employee doesn’t have to use it for business expenses or return the excess promptly.
  • The employer gives the employee money to pay for business expenses, regardless of whether the employer anticipates the employee having business expenses to cover.
  • The employer gives the employee a reimbursement it would have otherwise given as wages.

A non-accountable plan doesn’t mean that you won’t get your reimbursement. It simply means that your reimbursement payment will count as income, and your employer will have to withhold a portion for taxes as they would any other wages.

Where can I find a reimbursement form?

If you expect to receive a reimbursement from an organization, you may have to fill out a reimbursement form. Most employers and insurance companies have a standardized reimbursement form available for you to provide the information necessary to get your payment.

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