Employee Benefits-IRS Says That Recharacterizing Taxable Wages As Nontaxable Reimbursements Does Not Meet The Accountable Plan Rules, And Thus The Wages Remain Taxable

In Revenue Ruling 2012-25, the Internal Revenue Service (the “IRS”) provides guidance for employers under section 62(c) of the Internal Revenue Code and the applicable regulations. The ruling clarifies that an arrangement which recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules under section 62(c) and the applicable regulations. The result is that those wages remain taxable. The Revenue Ruling includes four situations. Three of the situations illustrate arrangements that impermissibly recharacterize wages, such that the arrangements are not accountable plans. The fourth situation illustrates an arrangement that does not impermissibly recharacterize wages, where an employer prospectively alters its compensation structure to include a reimbursement arrangement.