Reimbursement for Employee Expenses: 2026 Complete Guide

TL;DR

Reimbursement for employee expenses is the process of paying workers back for legitimate business costs they covered out of pocket. When structured through an IRS-compliant accountable plan, these payments are tax-free for employees and fully deductible for the business. For 2026, the permanent elimination of the unreimbursed employee expense deduction makes employer reimbursement programs more important than ever. Health insurance premium reimbursement through HRAs, particularly ICHRAs, is the fastest-growing category.

Explore ICHRA reimbursement options to see how health expense reimbursement fits into your benefits strategy.

What Is Reimbursement for Employee Expenses?

Reimbursement for employee expenses is the process by which an employer repays a worker for business-related costs paid out of the worker’s own pocket. Think airfare for a client meeting, a new monitor for remote work, or monthly health insurance premiums. The employee spends money in the course of doing their job, provides documentation, and the employer pays them back.

This arrangement matters for two reasons. For employees, it means they aren’t personally absorbing the cost of doing business. For employers, a properly structured reimbursement program keeps these payments off the employee’s W-2 while preserving a full business deduction.

The concept is straightforward, but the rules governing it are not. Federal tax law, state labor codes, and various IRS publication updates all shape how reimbursement for employee expenses works in practice. Getting it right protects both sides. Getting it wrong turns tax-free repayments into taxable income overnight.

Common Types of Reimbursable Employee Expenses

Not every dollar an employee spends qualifies for reimbursement. The expense must have a clear business purpose. Here are the categories employers most commonly reimburse.

Business Travel

Airfare, hotel stays, rental cars, ride-shares, and other transportation costs incurred while traveling for work. Meals during business travel are also reimbursable, though the employer’s deduction is generally limited to 50%.

Mileage

When employees use personal vehicles for business purposes, the IRS standard mileage rate provides a simple reimbursement benchmark. For 2026, that rate is 72.5 cents per mile, up from 70 cents in 2025. This rate covers gas, depreciation, insurance, and maintenance in a single figure.

Per Diem

Rather than collecting individual meal and lodging receipts, employers can use federal per diem rates. The 2026 standard CONUS (continental U.S.) rate is $178 per day, broken into $110 for lodging and $68 for meals and incidentals. Per diem simplifies accounting significantly for companies with frequent travelers.

Remote Work and Home Office Expenses

This category has expanded rapidly since 2020. The IRS allows reimbursement of shared costs like home internet or a personal cell phone plan, but only for the business-use portion. If an employee pays $100 per month for internet and uses it 50% for work, you can reimburse $50 tax-free. Many employers also cover ergonomic furniture, monitors, and other home office equipment.

Office Supplies and Equipment

Pens, paper, printer cartridges, software subscriptions, and similar items purchased for work purposes. These are typically low-dollar expenses, but they add up.

Professional Development and Tuition

The $5,250 employer-provided educational assistance exclusion is now permanent under the One Big Beautiful Bill Act (OBBBA), signed in 2025. This means employers can reimburse tuition, student loan payments, and training costs up to that amount without it counting as taxable income.

For a deeper look at which expenses qualify and how each is taxed, see this overview of employee reimbursement types and tax rules.

Commuter and Parking Benefits

For 2026, the monthly exclusion for qualified parking is $340, and the monthly exclusion for transit passes and commuter highway vehicle transportation is also $340. Note that the OBBBA permanently eliminated the exclusion for qualified bicycle commuting reimbursements for tax years beginning after 2025.

Health Insurance Premiums

This is the single largest and fastest-growing category of employee expense reimbursement. Through Health Reimbursement Arrangements (HRAs), employers can reimburse workers for individual health insurance premiums and qualifying medical expenses tax-free. More on this below.

How It Works: The IRS Accountable Plan

The accountable plan is the foundation of tax-free employee expense reimbursement. Governed by Internal Revenue Code Section 62©, it’s the mechanism that keeps reimbursements off the employee’s W-2 and preserves the employer’s deduction.

An accountable plan must satisfy three requirements:

1. Business Connection

The expense must be incurred while performing duties as an employee. A laptop bought for work qualifies. A personal vacation does not.

2. Adequate Accounting (Substantiation)

The employee must provide documentation verifying the amount, time, place, and business purpose of the expense. The IRS safe harbor gives employees 60 days from the date the expense is incurred to substantiate it. This means receipts, invoices, or other proof.

One practical note: the IRS has a de minimis rule where receipts are not required for non-lodging expenses under $75. You still need to record the amount, time, place, and business purpose, but you don’t need a physical receipt. Practitioners on Reddit have pointed out that when companies enforce rigid receipt requirements on sub-$20 expenses, employees often switch to more expensive, receipt-generating alternatives, costing the company more. Aligning your policy with the $75 threshold is both compliant and cost-effective.

3. Return of Excess

If an employee receives an advance or reimbursement that exceeds actual expenses, they must return the excess within 120 days of receiving it. This is the final piece of the IRS’s 60/120-day safe harbor framework.

What Happens Without an Accountable Plan?

If your reimbursement arrangement doesn’t meet all three requirements, the IRS treats it as a non-accountable plan. The consequences are significant.

Under a non-accountable plan, the entire reimbursement is included in the employee’s gross income and is subject to withholding and payment of employment taxes including FICA, FUTA, and income tax. That’s a lose-lose for both sides.

Small business coach and CPA Peggy James puts it simply: “The best place to start? Document, document, document. You need to have a written policy about employee expenses that defines what they are, how they should be treated, and what that means for employees.”

Is Employee Expense Reimbursement Required by Law?

The answer depends on where your employees work, not where your company is headquartered.

Federal Baseline

Under the Fair Labor Standards Act (FLSA), employers must reimburse expenses only when those costs would cause an employee’s effective hourly pay to drop below the federal minimum wage of $7.25 per hour. For most salaried and well-paid hourly workers, this threshold rarely comes into play.

State-Level Mandates

State law is where things get meaningful. Currently, 12 states, the District of Columbia, and the city of Seattle have laws requiring employers to reimburse necessary work-related expenses. The strictest states include California, Illinois, and Massachusetts, which require reimbursement of all necessary business expenses regardless of the employee’s wage level.

This matters enormously for remote work. If your company is based in Texas (no reimbursement law) but you have a remote employee in California, you must follow California law for that employee. Expense reimbursement obligations follow the worker, not the employer’s headquarters.

Other states with reimbursement requirements include Montana, North Dakota, South Dakota, Iowa, New Hampshire, and New York (for certain industries). If you employ people across multiple states, your reimbursement policy needs to account for the most protective laws that apply.

2026 Tax Changes Employers Need to Know

The One Big Beautiful Bill Act (OBBBA) made several permanent changes that directly affect how reimbursement for employee expenses works going forward.

Unreimbursed Employee Expense Deduction: Permanently Gone

The Tax Cuts and Jobs Act of 2017 suspended employees’ ability to deduct unreimbursed business expenses on their personal tax returns through 2025. The OBBBA made that suspension permanent. This is a big deal. Employees can no longer write off business costs their employer didn’t reimburse. If your company doesn’t have a formal reimbursement program, your workers are absorbing those costs with no tax relief at all.

This change makes it more important than ever for employers to establish accountable plans. Businesses should consider implementing IRS-compliant reimbursement plans to ensure these expenses remain deductible and tax-free for employees.

Schedule a consultation to discuss how these 2026 tax changes affect your reimbursement and benefits strategy.

On-Site Meal Deduction: Eliminated

Businesses can no longer deduct the cost of on-site meals provided for convenience, such as lunch during an on-site meeting. These expenses were previously 50% deductible. If you’ve been providing free meals as a perk, the tax math just changed.

IRS Mileage Rate: Increased

As noted above, the 2026 standard mileage rate rose to 72.5 cents per mile. Companies still using 2025 rates in their policies should update immediately.

Employer Student Loan Repayment: Permanently Extended

The $5,250 exclusion from income for employer-provided educational assistance, including student loan repayments, is now permanent for payments made after 2025. This was previously set to expire.

Bicycle Commuting Reimbursement: Eliminated

The exclusion for qualified bicycle commuting reimbursements has been permanently eliminated for tax years beginning after 2025. If you were offering this benefit, those payments are now taxable income to the employee.

Health Insurance as Employee Expense Reimbursement

Health insurance premiums represent the largest ongoing expense most employees face, and reimbursing those premiums through an HRA is rapidly becoming the preferred approach for small and mid-size employers.

What Is an HRA?

A Health Reimbursement Arrangement is a way for employers to provide tax-free reimbursements to employees for qualified medical expenses up to a set annual amount. This can include monthly insurance premiums and out-of-pocket costs like copays and deductibles, without requiring the employer to offer traditional group health coverage.

For small businesses exploring this approach, here’s a helpful guide on HRAs for small businesses.

ICHRA: The Fastest-Growing Option

The Individual Coverage HRA (ICHRA) allows employers of any size to reimburse employees for individual health insurance premiums with no cap on the reimbursement amount. Employers can set different allowance levels by employee class (full-time vs. part-time, salaried vs. hourly, geographic location, etc.).

ICHRA adoption is surging. As of 2025, the HRA Council estimated that almost 450,000 people had ICHRA benefits. By 2026, Health Sherpa reported as many as 800,000 people using ICHRA benefits. With Mercer reporting that total health benefit costs per employee rose 6% in 2025 and are projected to rise another 6.7% or more in 2026, the economic case for ICHRA keeps getting stronger.

The tax treatment is clean: ICHRA reimbursements are free of payroll taxes for the employer and free of income taxes for the employee. They don’t appear on W-2s at the end of the year.

If you’re considering making the switch, read this complete guide to ICHRA adoption.

QSEHRA: For Employers with Fewer Than 50 Workers

The Qualified Small Employer HRA (QSEHRA) is available only to employers with fewer than 50 full-time equivalent employees who don’t offer group health insurance. For 2026, contribution limits are $6,350 for self-only coverage and $12,800 for family coverage.

Practitioners on Reddit note that business owners often feel torn between group plans and HRA alternatives. Group plans provide predictability but can be prohibitively expensive, especially for small teams. HRAs like ICHRA and QSEHRA offer flexibility but shift some responsibility onto employees, who must navigate the individual marketplace themselves. This is where in-house broker support becomes valuable, helping employees find the right plan without the employer managing a group policy.

How HRAs Compare to HSAs and FSAs

These three acronyms get confused constantly. The key distinctions:

• HRA (Health Reimbursement Arrangement): Employer-funded only. No contribution cap for ICHRA. Used to reimburse premiums and qualified medical expenses.
• HSA (Health Savings Account): Employee and employer can contribute. Requires a high-deductible health plan. Funds roll over and belong to the employee.
• FSA (Flexible Spending Account): Employee-funded (employer can contribute). 2026 cap of $3,400. Use-it-or-lose-it (with limited rollover or grace period options).

For a detailed comparison, see this breakdown of HRA vs. HSA differences, limits, and how to choose.

Best Practices for Setting Up a Reimbursement Policy

A reimbursement policy doesn’t need to be long, but it needs to be clear and written down.

Start with a Written Policy

Define which expenses are reimbursable, spending limits for each category, required documentation, and submission deadlines. Distribute the policy during onboarding and make it easily accessible. According to GBTA Foundation research, companies spend over 3,000 hours per year fixing expense report errors. A clear policy prevents most of those errors before they happen.

Set Realistic Documentation Standards

Align your receipt requirements with the IRS $75 de minimis threshold. Requiring receipts for a $4 coffee creates friction without improving compliance. Focus documentation efforts on larger expenses and lodging, where the IRS has no de minimis exception.

Automate Where Possible

Manual expense reports are slow, error-prone, and frustrating for everyone involved. Expense management software can auto-classify expenses, flag non-reimbursable items, and route approvals efficiently. For health insurance reimbursement specifically, platforms that integrate ICHRA administration with payroll eliminate duplicate data entry and ensure reimbursements flow correctly each pay period.

For practical guidance, see this step-by-step guide to approving and paying claims.

Audit Regularly

The ACFE’s 2024 Report to the Nations found that typical organizations lose an estimated 5% of revenue each year to fraud, with expense reimbursement fraud being a significant contributor. Regular audits, even informal spot checks, are the most effective deterrent.

Bridge Health Reimbursement into Payroll

For ICHRA and other HRA-based reimbursements, integrating your benefits platform with your payroll system is the single highest-impact efficiency move. It reduces reconciliation headaches, ensures tax treatment is handled correctly, and gives employees faster access to their reimbursements. Learn more about ICHRA with payroll integration.

Reimbursement vs. Stipend vs. Allowance

These terms are often used interchangeably, but they have different tax and compliance implications.

A stipend of $100/month for “wellness” or “remote work” is simpler to administer but will be taxed as income. A reimbursement for the same $100 in documented business expenses is tax-free. The distinction matters for both employer cost and employee take-home pay.

Frequently Asked Questions

Are employers legally required to reimburse employee expenses?

At the federal level, only when unreimbursed expenses would push an employee’s effective hourly wage below the $7.25 federal minimum. However, 12 states plus DC and Seattle have broader laws requiring reimbursement of necessary business expenses regardless of wage level. California and Illinois are the strictest.

What happens if my company doesn’t have an accountable plan?

All reimbursements default to non-accountable plan treatment. That means the full reimbursement amount is taxable income to the employee, reported on their W-2, and subject to FICA, FUTA, and income tax withholding. Both the employer and employee end up paying more in taxes.

Can employees still deduct unreimbursed business expenses on their tax returns?

No. The OBBBA permanently eliminated the unreimbursed employee expense deduction starting in 2026. Employees have no way to recover unreimbursed business costs on their personal returns, making employer reimbursement programs the only path to tax-free treatment.

Do I need receipts for every expense under an accountable plan?

Not for non-lodging expenses under $75. The IRS de minimis rule waives the receipt requirement for these smaller expenses, though you still need to document the amount, time, place, and business purpose. Lodging always requires a receipt regardless of the amount.

What is the IRS mileage rate for 2026?

The standard mileage rate for business use of a personal vehicle is 72.5 cents per mile for 2026, up from 70 cents in 2025.

How does ICHRA differ from traditional group health insurance?

With ICHRA, the employer sets a reimbursement allowance and employees choose their own individual health insurance plans. With group insurance, the employer selects and partially funds one plan for everyone. ICHRA reimbursements are tax-free and have no maximum cap. The employer gets cost predictability, and employees get plan choice. Adoption has grown rapidly, with approximately 800,000 people covered by ICHRA in 2026.

Can I reimburse remote employees for home internet and phone?

Yes, but only for the business-use portion. If an employee uses their home internet 50% for work, you can reimburse 50% of the cost tax-free under an accountable plan. Remember that reimbursement obligations follow the state where the employee works, so a remote worker in California must be reimbursed even if your company is based in a state without such requirements.

What are the 2026 QSEHRA contribution limits?

For 2026, QSEHRA limits are $6,350 for self-only coverage and $12,800 for family coverage. QSEHRAs are available only to employers with fewer than 50 full-time equivalent employees who don’t offer group health insurance.

Ready to set up tax-free health insurance reimbursement for your team? Schedule a demo to see how SimplyHRA automates ICHRA administration, from employee classes and expense approvals to payroll-triggered reimbursements.