July 7, 2022
Explainer

How your expense reimbursement policy is limiting your company

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Ideally, expense reimbursement policies deter fraud and reduce business spend. But the truth is, it bogs down employees with confusing processes and personal financial repercussions. To avoid this, you should prioritize creating an expense reimbursement process that’s clear, quick, and efficient for both you and your employees. 

Below we offer some best practices for creating a fair and easy-to-use employee reimbursement policy—plus one way to reap the benefits of a policy with none of the downsides. 

What is an expense reimbursement policy?

A reimbursement policy lays out the guidelines and processes employees must follow to get reimbursed for out-of-pocket business expenses. 

This document sets expectations on what expenditures will and will not be reimbursed, and reassures employees that their purchases will be paid back in a timely manner. Additionally, reimbursement policies help you minimize expense fraud and document deductible business expenses for tax time. 

What’s considered a reimbursable business expense?

Reimbursement policies are generally left up to companies to decide because necessary expenses differ between businesses and even between roles in the same organization. 

With that said, here are some business expense categories you’ll find in most reimbursement policies. 

Business travel

Travel expenses incurred on business trips typically make up most of a company’s employee reimbursements. As a result, organizations often have a separate T&E reimbursement policy document just for this expense category.

This includes airline tickets, hotel accommodations, rental cars, taxi fares, and even parking fees. Mileage reimbursements for employees using their personal vehicle for work-related travel—even for trips to and from the office supply store—also fall under T&E management

Office supplies

Supplies deemed “ordinary and necessary” to run your company fall under this expense category, including:

  • Pens
  • Printer paper
  • Light bulbs
  • Cleaning supplies

Compared to office expenses like software and computers used for general business operations, supplies refer to low-ticket items that are replenished regularly. 

Training and development

If employees undergo training, they can get reimbursed for their out-of-pocket expenses. However, since only some educational expenses qualify as business deductions and guidelines vary depending on your situation, you'll want to consult your accountant beforehand. 

Meals and entertainment

Meals and entertainment expenses are reimbursable if they are reasonable and have a clear business purpose. Typically, businesses only get a 50% deduction on this type of expense. But due to the Taxpayer Certainty and Disaster Relief Act, companies can deduct the full amount of certain business meals expenses incurred in 2022.

4 best practices for creating a reimbursement policy

Set up an accountable plan

An accountable plan ensures that employee reimbursements aren’t counted as taxable income. To ensure your plan is compliant with IRS guidelines, make sure your policy includes the following requirements:

  • Employees can only be reimbursed for “ordinary and necessary” work-related expenses
  • Employees must report these expenses with proper documentation within a reasonable amount of time (typically 60 days)
  • Employees who receive excess reimbursements or allowances must return the money within a reasonable amount of time (typically 120 days)

Document your business expense reimbursement policy 

Clear guidelines and processes help you avoid costly misunderstandings and misinterpretations of your policy.

Start by deciding what business-related expenses will and won’t be reimbursed, and clearly define them. Offer example scenarios so employees can visualize how they should use the policy in real life. You’ll also want to consult with your operations, finance, and human resources teams as well as your accountant and lawyer to make sure you aren’t missing anything crucial. 

Download the expense policy we use here (in it you can find our reimbursement policy as well), and tailor the template to your company’s needs, or create your own with our expense policy builder

Define your approval process

You’ll also need a process for employees to submit expense reports for approval and reimbursement by your finance team. Some questions to think about include:

  • Who will review the reimbursement forms?
  • When will employees receive payment?
  • How will employees receive reimbursements—through direct deposit, cash, or some other method?

Employees must also submit receipts for documentation of their expenses, but you’ll need to be clear about your requirements here to avoid confusion. Typically, you’ll need details like the purpose, vendor, cost, and date of purchase on the receipt. Finance teams may also require itemized receipts to make review easier and reduce fraud. 

Launch your policy

Before deploying your new policy, have some employees read it to ensure it makes sense. They may be able to spot confusing guidelines or phrases that need to be clarified for the rest of your workforce. 

When you’re ready, release the reimbursement policy to the entire company. Make sure to add the document to your employee handbook and in a common cloud-based drive or communication channel for anyone to reference. 

If you’re thinking this is a lot, you’re right. Your business’s income (and that of your employees) should be handled responsibly, so take care when designing your reimbursement policy. 

Still, there’s an alternative way to approach expense management for small businesses so you don’t turn your employees into lenders. Here are 3 reasons why employee reimbursements aren’t ideal and how to solve this dilemma.

Why reimbursing employees is an outdated approach

Employees must front cash for reimbursable expenses

Most employees don’t have the resources to make the kinds of purchases businesses do, so it’s unfair to make them finance your organization—especially when companies get discounts on purchases made with company accounts or corporate credit cards. 

A 2019 report found that 38% of US employees pay out-of-pocket for business expenses at least once a month. Two in 5 of those respondents experienced cash flow issues as a result of delayed reimbursements.

Your employees work to fund their own obligations, goals, and wants. Their first priority isn’t the success of your company. So, if your workforce fronts money for your business, it’s best to ensure they’re paid back as quickly as possible to avoid causing them financial hardship. 

Reimbursements are time consuming

Collectively, employees, managers, and finance professionals spend hours on reimbursements alone—time that could be better spent elsewhere. After all, reimbursement activities don’t provide much additional value to your company aside from reducing spend.

Incorrect submissions result in more time spent reviewing claims, resulting in an even longer reimbursement process. And lost productivity doesn’t come cheap—Hubspot found that companies lose $1.8 trillion each year because of reduced employee productivity.

Unclear policies leave employees without reimbursement

A reimbursement policy that makes sense to your finance team may not align with everyone else’s understanding of the guidelines. Employees often encounter vague or confusing policies that they follow to the best of their ability, only to find they can’t get reimbursed because their purchases are out-of-policy.

These misunderstandings can breed frustration and resentment among your employees. So in order to maintain a positive employee experience, it’s important to create clear and understandable policy guidelines for your organization. 

After all, 85% of business leaders reported that improving employee experience and engagement resulted in higher customer satisfaction, improved customer experience, and increased revenue.

Ramp: A simpler & more effective alternative to employee expense reimbursement

The best practice for employee expense reimbursement is avoiding it entirely—a feat that any business can accomplish with Ramp’s powerful expense management features. 

Our corporate cards and expense management tools empower workers to make company purchases without risking their personal funds. Limit and control the types of transactions made with each card so employees never make out-of-policy purchases, then manage them all on one easy-to-use platform. And if you find yourself having to fulfill a reimbursement, Ramp makes it quick and employees can request them in just one click.

Without messy reimbursement policies to worry about, your employees can dive into the work that truly matters.

Explore our product demo to learn how Ramp can simplify business spend for your company.

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FAQs
What are the disadvantages of a reimbursement policy?

When employees are responsible for work-related purchases, they’re hurt the most by these policies. Not only must they pay for purchases out-of-pocket, reimbursement often takes far too long. And if they lose a receipt or make a mistake when submitting their claim, they may not get reimbursed at all.

Of course, employees don’t carry all of the burden—unclear policies and inefficient workflows slow down your finance team too.

Are there alternatives to expense reimbursement?

Some companies give employees advances or allowances so they don’t use their own money for work-related purchases.

However, this doesn’t work well for unexpected expenses. And if employees receive excess funds, they need to return it in a timely manner—resulting in additional work for them and the finance department.

Virtual cards help companies track and analyze spending in real-time. Combined with spend control, they encourage employees to make the purchases needed to do their job well without veering out-of-policy.

Can Ramp help with employee reimbursement?

Ramp eliminates the need for reimbursement with corporate cards and spend controls that prevent employees from spending out-of-policy. 

But if you prefer to keep your existing program, our software simplifies the reimbursement process and gets payments to employees within 3 business days—making it the fastest reimbursement tool on the market. 

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Streamline approvals.
Review requests, pre-approve expenses, and issue general expense cards in a few clicks – or directly in Slack. Delegate approvals and empower your team leads to spend on the things they need and control their team’s expenses.
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Issue instant cards.
Unlimited virtual and physical cards with built-in spend limits, instantly available for everyone in your team. Define spend rules and let your smart cards enforce your policies automatically. No more surprises or under-the-radar spending.
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See spend as it happens.
Stop waiting on monthly statements or manual spreadsheets. Find, browse, and download real-time transactions from any employee, department, or merchant – on any device.
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Close your books 5x faster.
An accounting experience by finance teams, built for speed and efficiency. Automate manual processes and start enjoying instant reconciliation – Ramp does all the heavy lifting.
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Trim wasteful spend.
Ramp analyses every transaction and identifies hundreds of actionable ways your company can cut expenses and alerts your team via email, SMS, or Slack. It’s like having a second finance team, laser-focused on cutting costs.
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Consolidate reimbursements.
Ramp makes it easy to reimburse your employees for any incidental out-of-pocket expenses. Review, approve, and pay employees back for anything that didn’t make it onto a card with the rest of your Ramp transactions.
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