IRS provides guidance to employers on wage characterization arrangements

Washington National Tax Services

The IRS recently issued Rev. Rul. 2012-25, clarifying that an arrangement that recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules under section 62(c).

The guidance sets forth four fact patterns, three of which illustrate arrangements that impermissibly recharacterize wages such that the arrangements are not accountable plans. The fourth fact pattern shows an arrangement that does not impermissibly recharacterize wages. In this arrangement, an employer prospectively altered its compensation structure with its employees to include an allowable reimbursement arrangement.

The new guidance may help employers craft reimbursement arrangements intended to meet the accountable plan requirements under section 62(c).



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