What is an expense reimbursement policy? A guide

An expense reimbursement policy refers to the guidelines a company establishes to ensure business expenses are properly documented, approved and paid back to employees. This is an essential component of effective expense management for businesses whose employees make company purchases using their own money. 

Keep reading to learn why having an expense reimbursement policy is important, and discover best practices for developing and implementing one.

Having an expense reimbursement policy in place is important for establishing clear expectations around how employees should make work-related purchases and how they can expect to be repaid. It can be helpful for the following reasons:

• Offers businesses more insight into expenditures and can promote effective expense management

• Outlines which expenses are eligible for reimbursement

• Provides transparency around how and when expenses may be approved

• Helps businesses maximize potential tax benefits and support compliance with IRS regulations

• Protects companies by helping them identify and prevent fraudulent employee claims

• Creates consistent and clear procedures, which can reduce delays in processing

Expense reimbursement policies generally outline the following process: Employees make work-related purchases, provide documentation for those expenses, create and submit an expense report, and then wait for approval and reimbursement from the appropriate reviewer or finance team. 

Here’s a typical step-by-step overview:

1. The employee pays out of pocket for business expenses, such as hotel rooms, mileage for company travel, office supplies or costs associated with entertaining clients.

2. The employee compiles proof of purchase, such as receipts or invoices. 

3. The employee creates an expense report based on the business’s process, which could include information about each purchase, the business purpose for each expense and the total amount spent. Some companies may use expense management software to automate the process.

4. The employee submits the finished expense report and any supplemental information to the appropriate person or department for approval.

5. The finance team evaluates the expense report against the company’s expense reimbursement policy to ensure compliance. If all requirements are met, the report can be approved.

6. The finance team processes the reimbursement, and the company pays the employee back—typically through direct deposit, though some companies may process reimbursement through payroll.

Examples of reimbursable expenses may fall into the following categories: Meals, travel, supplies and resources, and professional development.

• Meals: Eligible meal expenses could include lunches or dinners with partners or clients—both current or potential—as well as food or beverages served during internal meetings or client presentations.

• Travel: This category includes expenses incurred for flights, accommodations, transportation (including mileage) and meals while traveling for business. 

• Professional development: Qualifying professional development expenses may include costs for training, attending conferences, continuing education or certificate programs that promote employee growth.

• Supplies and resources: This refers to money employees spend on any tools or materials required to complete their day-to-day job functions, like office supplies, software or specialized equipment.

When creating an expense reimbursement policy, establish clear standards for both employees and the team responsible for reviewing and approving reimbursement requests, and consider testing the policy with a small group of employees.

Start by specifying which expenses qualify for reimbursement, which are excluded and the maximum spending limit for each category. When drafting your policy, you might consider including example scenarios for employees to review so they can better conceptualize how the policy applies to everyday situations.

You can outline each step of the reporting process so employees better understand what documents are required when submitting expense reports, how long they have to submit reimbursement requests and how to appeal any rejected submissions.

You can establish a well-defined process for approving expense reports by providing information like:

• The team members responsible for reviewing and approving expense reports

• The expected reimbursement timeline

• The payment method employees can expect for receiving reimbursement (such as direct deposit or cash)

You can try out a potential policy with a small group of employees to determine how effective it is and identify areas that could benefit from improvement. Once you’ve refined the policy based on employee input, you can roll it out to the larger organization. Communicate the policy clearly throughout the company and ensure that it’s easily accessible for all employees.

After establishing an expense reimbursement policy, you can set up a regular review schedule to monitor spending trends and ensure compliance. Periodic reviews can also help protect your company from fraudulent or inaccurate claims by providing greater visibility into duplicate submissions, excessive spending or altered receipts.

Here’s additional information about reimbursing expenses.

Creating an expense reimbursement policy can help set expectations for employees by providing guidance on eligible expenses, submission requirements and approval procedures. When running a business, having clear processes in place can promote consistency and efficiency while helping ensure expense reimbursements are handled accurately and in accordance with company guidelines.

Another process you might consider streamlining is your expense management. Expense Management from Capital One Business can help you track business expenses, simplify expense reporting and gain greater visibility into employee spending.