Facts
1.
Is this program
merely a method for avoiding employment taxes?
Definitely
not. Toolchex clients follow the industry
practice of requiring certain employees to provide their own tools as a
condition of employment, based on time-tested benefits that justify
such a
policy. Clients benefit:
•
Financially—by reducing their capital investment in tools and
equipment; and by
eliminating the recurring costs associated with maintenance,
replacement,
insurance, property tax payment, debt service, etc.
•
Managerially—by minimizing friction over employee care of tools,
employee
discontent with type and quality of tools, and employee down time while
waiting
for a tool to become available. Before
adoption of the Toolchex Accountable Plan, our clients have been
compensating
each such employee for time and labor, as well as reimbursing the
employee on a
nonaccountable plan basis for tools and equipment purchased by the
employee for
the above-stated benefits to the client.
The amount
of the reimbursement for tools
was not being identified as such—by category and specific rate—but was
acknowledged by the client and its employees to be generally
proportionate to
the employees’ investment in tools. It
was fundamentally unfair for employees to be paying taxes on expenses
incurred
for the benefit of their employer, and for the employer to be paying
employment
taxes on such expenses.
By adopting the
Toolchex Accountable Plan, our clients will:
• Reinforce
the philosophy that employees are highly valued and deserve fair and
equitable
treatment;
• Reinforce
the philosophy that employees have the capacity to increase their net
income
through investment in tools, training and certification, tool
insurance, tool
maintenance, tool interest, and other employee business expenses;
• Enable
their employees to be more efficient in serving their customers by
having the
right tool when necessary;
• Realize
increased customer satisfaction; and
• Foster greater
loyalty to the client and
reduce the rate of employee turnover as employees value the Toolchex
benefit.
2.
What is the legal
authority for the Toolchex Accountable Plan?
Toolchex clients
reimburse employee business expenses pursuant to a working condition
fringe
benefit under Treasury Regulation
§1.132-5(a)(1)(v) and an accountable plan under Treasury Regulation
§1.62-2(c)(1).
3.
What is the legal
authority for pre-tax treatment of the Toolchex benefit?
I.R.C. §132
excludes from gross income any fringe benefit that qualifies as a
working
condition fringe benefit, defining that term in §132(d) as any property
or
services provided to an employee which, if the employee paid for such
property
or services, such payment would be
allowable as a deduction under §162 or §167.
Section 162 provides a deduction
for all ordinary and necessary business expenses, and §167 provides a
deduction
for depreciation expenses. Treasury
Regulation §1.62-2(c)(4) provides that amounts an employer pays to an
employee
for employee business expenses under an accountable plan are excluded
from the
employee’s gross income, are not required to be reported on the
employee’s Form
W-2, and are exempt from the withholding and payment of employment
taxes. Treasury Regulation §§31.3121(a)-3,
31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations, and
Treasury
Regulations §1.6041-3(h)(1) of the Income Tax Regulations.
4.
Are there special
IRS requirements for an accountable plan?
Under §1.62-2(c)(1)
of the regulations, a reimbursement or other expense allowance
arrangement
satisfies the requirements of I.R.C. §62(c) if it meets “the three
requirements” set forth in paragraphs (d), (e), and (f) of Treasury
Regulation
§1.62-2: business connection, substantiation, and returning amounts in
excess
of expenses.
5.
How does Toolchex
determine what employee business expenses are eligible for
reimbursement?
An arrangement meets the business connection requirement if it provides reimbursements for business expenses that are allowable as deductions under sections 162 through 198 of the Internal Revenue Code, and that are paid or incurred by the employee in connection with the performance of services as an employee. Current year expenses allowable under those sections are obviously reimbursable. For tools purchased in previous years—depreciation expense is deductible under §167 of the Code and all tools required for employment maybe eligible as start-up costs for the employee’s job under §195 of the code.
6.
Is Toolchex bound
to follow depreciation periods, depreciation rules, election
requirements, etc.
in reimbursing for tool expenses?
In most cases,
once the Proof of Purchase has been established and verified by
Toolchex, the
expense will be tracked and reimbursed based on cost and date of
purchase. Under the Toolchex program all
tools fall
under 1 of 3 categories.
Category
1- All individual tools purchased during the current year, with a
nominal
purchase price, will be fully reimbursed during the current year.
Category
2- All individual tools purchased during the current year, deemed
necessary to
be depreciated over time, will be reimbursed through a 7 year MACRS
Depreciation Schedule.
Category
3- All individual tools purchased during a previous year, regardless of
price,
through a 7 year MACRS Depreciation Schedule.
7.
So, how does
Toolchex determine the benefit period and reimbursement rate?
The Toolchex
benefit is not an allowance rate or rental rate. It is a gradual
reimbursement
of actual, finite expenses. Toolchex
calculates a reasonable reimbursement period and rate that furthers the
industry philosophy of encouraging employees to consistently invest in
their
careers. The rate will vary between $1-8
per hour, based on the employer elected reimbursement percentage and
the
employees overall compensation rate.
8.
How does Toolchex
substantiate expenses?
All submitted
expenses that meet the Business Connection must be accompanied by a
proof of
purchase that includes date of purchase, a description of the purchase
and the
price of the purchase. Examples of Proof
of Purchase can include a sales receipt, bill of sale, vendor (tool
dealer)
print out, and banking statements.
9.
Is there any
change of ownership because of the tool reimbursement benefits?
No. In large measure, the employee
is being
reimbursed for the wear and tear on his tools (depreciation incurred)
on behalf
of the employer’s business. Furthermore,
the economic reality, and part of why the IRS recognizes the unique
nature of
such employee expenses, is that they must have their own tools before
they get
hired. If ownership of their tools were
transferred to the employer, it would be impossible to be hired again
following
termination.
10.
Does the Toolchex
Accountable Plan constitute an improper recharacterization of wages?
Maybe. Toolchex’s understanding as
an underlying
premise of the plan is that an employee is typically being paid a
greater wage
to offset his tool expenses. He is being
paid for his time and labor, with an additional “bump” for tools and
equipment. This bump is typically
increased for employees that have the greater tool inventory. The bump in pay
is not tied to the nature of the
service, which would be categorized as compensation for time and
labor—and
fully taxable. Rather, it is tied to the nature and cost of the
underlying
tools for which the employee business expense is incurred—and is not
considered
income pursuant to IRC §62(c), if reimbursed through an accountable
plan. Before the Toolchex Accountable Plan
is
adopted by a client company, this wage bump is considered a
reimbursement under
a non-accountable plan. The employee is
then limited to claiming his employee business expenses as a
miscellaneous
itemized deduction under the unreimbursed expense approach. Treasury Regulation §31.3121(a)-3(a) states:
“if both wages and the reimbursement or other expense allowance are
combined in
a single payment, the reimbursement or other expense allowance must be
identified either by making a separate payment or by specifically
identifying
the amount of the reimbursement or other expense allowance.”
Of course,
merely identifying the amount as a tool reimbursement does not convert
it to an
accountable plan, unless all of the requirements for an accountable
plan are
met. Toolchex is vigilant in maintaining
its plan as accountable under the Internal Revenue Code.
Toolchex ensures that the substantiation
requirements are satisfied, and uses the separate check approach to
comport
with the treasury regulation and best business practices for third
party
administration.
11.
How long have
Third Party Administrators been offering tool expense reimbursement
programs?
Roughly since
adoption of the Tax Reform Act of 1986 and the Family Support Act of
1988. There are several programs offered in
different regions of the country. Toolchex
is the largest program of its kind in the
