There are three deemed substantiation methods for travel within the U.S. Two are for full allowance plans (per diem and high-low) and the third is for meals and incidental plans:
- Per Diem Substantiation Method. This is a commonly used method of substantiating an employer's per diem allowance rate. It relies on the federal per diem rates, which are the rates the federal government pays its employees. These rates vary by city and locality.
- High-Low Substantiation Method. This method is designed to overcome the problems associated with tracking the different federal per diem rates, and can be used in lieu of the per diem substantiation method. The IRS establishes a per diem allowance rate for lodging, meals, and incidental expenses based on a high rate for the expensive areas of the country, and a low rate for other locations.
- Meals and Incidentals Substantiation Method. This is a special method used when the employer pays only the employee’s meal and incidental (M&IE) costs. It uses the M&IE component of the federal per diem rates as the federal rate for substantiation purposes.
In Rev. Proc. 2009-47 (2009-42 IRB 524), the IRS updated Rev. Proc. 2008-59 (2008-41 IRB 857) for determining when an employee's lodging, meals, and incidental expenses incurred while traveling away from home on business will be substantiated under Reg. 1.274-5 when the employer (or third party) provides a per diem allowance under a reimbursement or other expense allowance arrangement. Rev. Proc. 2009-47 also revises the list of high-cost localities when using the high-low method. While the updated rules and rates apply to per diem allowances paid to an employee on or after October 1, 2009 for expenses paid or incurred for travel away from home on or after that date, there are transition rules for the last three months of 2009.
Per Diem Substantiation Method
The federal government establishes per diem rates for key cities and localities within the continental U.S. (CONUS) to pay per diem allowances to its employees traveling on business. These federal per diem rates are a composite of the federal lodging rate and the federal meals and incidental expenses (M&IE) rate, which includes the cost of three daily meals and incidental expenses an employee would incur for a single night’s stay. Special rules and rates apply for travel outside the continental U.S. (OCONUS) to nonforeign localities (including Alaska, Hawaii, Puerto Rico, and U.S. possessions), and to foreign localities. The CONUS and OCONUS rates can be found at www.gsa.gov under "Per Diem Rates."
The term "incidental expenses" has the meaning given in the Federal Travel Regulations, and includes (1) fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships; (2) hotel servants in foreign countries; (3) transportation between places of lodging or business and places where meals are taken, if suitable meals can be obtained at the temporary duty site; and (4) the mailing cost associated with filing travel vouchers and payment of employer-sponsored charge card billings.
High-Low Substantiation Method
The federal per diem rates differ among key cities and localities throughout the U.S. If employees travel to different locations during the year, use of the per diem substantiation method requires the use of different rates, which can be complicated and time consuming. To simplify things, the high-low substantiation method classifies key cities or localities within the CONUS that have a federal per diem rate exceeding a certain amount for all or part of the calendar year as high-cost localities. All other cities or localities are classified as low-cost localities.
Rev. Proc. 2009-47 assigns a per diem rate of $258 to all high-cost localities, $65 of which is for meal and incidental expenses. The per diem for other localities is $163, with $52 deemed to be for meal and incidental expenses.
Rev. Proc. 2009-47, Sec. 5.03, provides an updated list of the high-cost key cities or localities. If a city or locality is not listed, it is a low-cost locality. Certain key cities or localities (mainly tourist areas) are treated as high-cost localities for part of the year. Thus, the time of year is important when determining the high-low cost designation for many seasonal cities or localities.
The list of high-cost localities in Rev. Proc. 2009-47 differs from the list of high-cost localities in Rev. Proc. 2008-59 as follows (changes listed by key cities):
- The following localities have been added to the list of high-cost localities: Monterey, California; Denver/Aurora, Colorado; Bar Harbor, Maine; Conway, New Hampshire; Glens Falls, New York; Lake Placid, New York; and Hershey, Pennsylvania.
- The portion of the year for which the following are high-cost localities has been changed: Phoenix/Scottsdale, Arizona; Napa, California; San Diego, California; Telluride, Colorado; Vail, Colorado; Miami, Florida; Naples, Florida; Baltimore City, Maryland; Cambridge/St. Michaels, Maryland; Ocean City, Maryland; and Jamestown/Middletown/Newport, Rhode Island.
- The following localities have been removed from the list of high-cost localities: Crested Butte/Gunnison, Colorado; Silverthorne/Breckenridge, Colorado; and Palm Beach, Florida.
- The following localities have been redefined: Floral Park/Garden City/Great Neck, New York no longer includes Glen Gove and Roslyn; Tarrytown/White Plains/New Rochelle, New York no longer includes Yonkers.
Transitional Rules Apply
An employer that used the per diem substantiation method of Rev. Proc. 2008-59 for an employee during the first nine months of 2009 can't use the high-low substantiation method in Rev. Proc. 2009-47 for that employee until January 1, 2010.
An employer that used the high-low substantiation method of Rev. Proc. 2008-59 for an employee during the first nine months of 2009 must continue using that method for the rest of calendar year 2009 for that employee. Such an employer can use the rates and high-cost localities in Rev. Proc. 2008-59 for travel from October 1, 2009 through December 31, 2009, instead of the updated rates and localities in Rev. Proc. 2009-47, if those rates and localities are used consistently during this period for all employees reimbursed under this method.
Meals and Incidentals-only Method
If the employer pays an employee under an M&IE allowance plan, a special meals and incidental expenses-only method can be used as the benchmark rate against which to compare the M&IE allowance (Rev. Proc. 2009-47, Sec. 4.02). This substantiation method is based on the federal M&IE rate for the locality of travel for that day (or partial day), and is used when lodging expenses are not incurred because (1) the payor pays the employee’s actual lodging expenses, (2) the payor provides the lodging in kind, (3) the payor doesn’t believe that the employee has or will incur lodging expenses, or (4) the allowance is similar to that used in computing the employee’s compensation (e.g., number of hours worked, miles traveled, etc.).
Closing Thought
Per diem allowance plans provide a number of important advantages:
- Per diem allowance plans eliminate the need for employees to gather documentation and receipts supporting the actual amount spent while traveling on business. Instead, employers reimburse employees at a standard rate without regard to the amount actually spent by the employee. However, employees must keep records to prove the dates, location, and business purpose of the travel expenses before the allowance can be treated as made under an accountable plan.
- Per diem allowances not exceeding the federal rate are exempt from wage withholding and reporting requirements.
- Employees can keep excess advances for days of substantiated travel without disqualifying the otherwise accountable nature of the per diem allowance plan. On the other hand, accountable plans that reimburse actual expenses must require employees to return all excess advances within a reasonable period of time.
See Chapter 10 of PPC's Guide to Compensation and Benefits for more on per diem travel allowance plans.
