The Internal Revenue Service (IRS) has informed the Washington State Office of Financial Management, and agencies thereof, that when employees are reimbursed for meals under the “three hour rule” when no over-night travel occurs, the employer (WSU) is required to report the meal reimbursement as a taxable fringe benefit. On Monday, November 1 the Executive Committee agreed that compliance with this federal tax regulation will occur on January 1, 2000.
According to IRS regulations, meal reimbursements are to be reported as taxable income, unless the employee is required to incur overnight lodging or there is a substantiated business connection. When the meal reimbursements are determined to be taxable fringe benefits, WSU is required to withhold and pay over employment taxes (Federal income tax, social security and medicare) to the IRS with matching employer contributions for social security and medicare taxes.
What is the three hour rule? A traveler may be reimbursed for meal expenses only after the traveler is in travel status for three hours beyond the traveler’s regularly scheduled working hours for any one day.
What is a substantiated business connection?
Non overnight meal reimbursement will be treated as non-taxable provided a substantial business discussion occurs during the meal. When seeking reimbursement for business related meals, employees must document the purpose of the meeting and who was in attendance. This includes the “meals with business” rule as outlined in BPPM 70.31.
When will this change be effective? Non-overnight travel meal reimbursements that do not have a substantiated business connection paid on or after January 1, 2000 will be treated as a taxable fringe benefit.
Will this change affect other reimbursements such as mileage? No, this change only affects the taxability of meal reimbursements when non-over night travel occurs.
How will the employee be reimbursed? In addition to receiving a travel check for the non taxable expense, reimbursement of the taxable non-overnight meals will be paid through the Payroll system with the payment included in the next regularly scheduled paycheck. the employee will continue to be reimbursed through Travel for non taxable amounts.
Does the department have to change what they submit for the employee’s travel expense voucher reimbursement? No, there is no change to what a department submits for Travel Expense Voucher (TEV) reimbursement. Rather then the department submitting multiple forms for the same trip, there is no change to the TEV. The Travel staff will take the one TEV, and reimburse the traveler for non-taxable expenses as normal. The Travel staff will submit documentation to the Payroll system causing the non-overnight meal reimbursement to be included in the next regularly scheduled payroll calculation.
How will the meal expense appear in the accounting system? Since this expense will be listed on the department’s Payroll Expenditure Audit Report as a meal reimbursement, it will appear in the accounting system in object 01, as wages, with the corresponding benefit expense appearing in object 07.
Where can I find out more about this change?
Both Travel and Benefits and Payroll Services have posted additional information on their WEB sites about this change. Training is prepared and ready to be delivered. If you would like to have the training conducted in your area, college or department, please contact either of the following people to schedule the training; Judy Croskey (5-2030), or Alice Smethurst (5-1277).
In summary, this change is mandated by the IRS and we and the State of Washington are required to comply with this law. Unfortunately, we have no choice but to implement this policy so please bear with us while we conform to this requirement. Thank you for your patience and understanding.