The IRS recently issued a revenue ruling explaining that expense reimbursement arrangements that recharacterize taxable wages as nontaxable reimbursements do not satisfy the business connection requirement for accountable plans. Under the regulations, if a reimbursement arrangement meets the requirements of business connection, substantiation, and returning amounts in excess of substantiated expenses, all amounts paid under the arrangement are treated as paid under an accountable plan. Amounts treated as paid under an accountable plan are excluded from an employee’s gross income. The regulations also provide that the business connection requirement will not be satisfied if an employer pays an amount to an employee regardless of whether the employee incurs, or is reasonably expected to incur, deductible business expenses. The IRS guidance describes four examples of expense reimbursement arrangements. The first three examples in the Revenue Ruling are not considered nontaxable reimbursements because the amount being paid is a substitute for an amount that would otherwise be paid as wages. In other words, the employees will get paid the same amount regardless of the amount of expenses they incur. The fourth example, however, is considered to provide nontaxable wages under an accountable plan because the reimbursements are not in lieu of wages that the employee would otherwise be entitled to receive. (Revenue Ruling 2012-25)