Tax-free reimbursements are one of the fundamental characteristics of Travel Nursing pay packages. Of course, the IRS has rules that companies must follow when they pay these tax-free reimbursements. Some industry tax experts say that tying tax-free reimbursements to Hours Worked is a violation of these rules. Meanwhile, most, if not all, travel nursing companies do just that. However, recent court cases bring the prevailing wisdom into question. In this article, we’ll take a closer look at the debate over whether employers tying tax-free reimbursements to hours is a violation of IRS guidelines.
Before we begin, it’s important to note that BluePipes and its affiliates do not provide tax, legal or accounting advice. We wrote this article for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors to discuss your own unique circumstances.
Basic Background on Travel Nursing Tax-Free Reimbursements
To begin, let’s take a look at some background information to set the stage. The IRS allows employers to provide employees with tax-free reimbursements for all sorts of work related costs. For example, travel expenses, CEUs, uniforms, licenses, certifications, lodging and meals are all costs that agencies commonly reimburse travel nurses for.
Again, employers must follow certain rules in order to provide these tax-free reimbursements. The IRS says an employer has an “accountable plan” when the employer follows the rules. They call it an “unaccountable plan” when the employer doesn’t follow the rules.
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Such reimbursements are pretty straight forward in most other industries. The employee incurs a qualifying expense and the employer reimburses them for it. It’s plain and simple.
Complexities in the Travel Nursing Industry
However, it’s a little more complicated in the travel nursing industry. First off, agencies make money by billing hospitals for their nurse’s time. The agency uses this money to compensate the nurse. Therefore, if the nurse doesn’t work, then the agency can’t bill the hospital. As a result, the agency doesn’t get the money they were counting on to be able to compensate the nurse.
Additionally, travel nurses incur these expenses over a 13 to 26 week period. This is much different than if the nurse was leaving on a two day business trip. As a result, the travel nurse’s chances of missing work are much higher.
Typing Per Diems to Hours Worked
For this reason, most, if not all, travel nursing agencies tie their reimbursements to hours worked. In most cases, agencies confine this practice to the “Per Diems”. The Per Diems are the lodging reimbursement and the meals reimbursement.
Agencies typically do this in one of two ways. First, they can come right out and tell the traveler that the agency pays reimbursements by the hour up to a maximum number of hours per week. The maximum is typically the number of weekly hours in the contract. This practice is less common.
Alternatively, some agencies will levy a penalty for missed hours. That penalty will just so happen to equal the value of the tax-free reimbursements. Thus, it’s essentially the same exact policy with different wording.
The question we’re looking at in this article is whether or not the IRS allows travel nursing companies to tie per diems to hours worked. After all, the travel nurse is going to incur the expense regardless of whether or not they work. Moreover, some of the industry’s leading tax experts argue that tying reimbursements to hours worked is risky. Others argue that it unquestionably disqualifies an agency’s accountable plan.
The Issue Gets Debated in a Court Case
Well, legal teams representing travel nurses and agencies argued this matter in two recent court cases. However, the two cases aren’t actually about this topic specifically. Instead, the cases are about how agencies calculate overtime pay rates when they tie reimbursements to hours worked. Both cases played out quite similarly. Therefore, we’ll focus on one of the cases in this article.
According to the Plaintiffs’ lawyers, the Federal Department of Labor’s “Field Operations Handbook” requires employers to factor the value of per diems into the regular rate of pay for the purpose of calculating the overtime rate of pay IF the employer ties the per diems to hours worked. They argued that the defendants, the staffing agencies, did not do this. Instead, they argued, the agencies based their overtime rates on the taxable wage alone. Therefore, the plaintiffs argued that the travel nurses were underpaid for their overtime hours.
Used to Challenge the Class Certification
So, how is it that the two sides came to argue the tax implications of tying per diems to hours worked? According to court documents, the defendants brought the issue up when they tried to get the judge in the case to deny the Plaintiffs’ Motion for Class Certification. You see, a party seeking to establish a Class Action Lawsuit must satisfy four requirements: numerosity, commonality, typicality and adequacy of representation.
The defendants challenged that the plaintiff’s lawyers had not established adequacy of representation. They asserted that the lawyers would be the only ones to benefit financially from this litigation. And THIS is the point at which the tax implications of tying per diems to hours worked came up.
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The defendants argued that the per diem payments would become taxable if the court in this case ruled that the agencies tied per diem expenses to hours worked. As a result, the plaintiffs would end up owing taxes on the per diems. Therefore, the defendants argued, the vast majority of class members would end up losing money.
No Legal Authority Cited
Ultimately, the judge denied the defendants’ request and granted the Class Action status. The judge’s ruling includes several interesting pieces of information. First, the judge clearly states that the defendants did not cite any legal authority when they argued that per diem expenses would become taxable if the court in this case considered them hourly compensation. This is interesting because one would think that a legal authority would be easy to find if this issue was cut and dry.
Issues Are Not Coextensive
Second, the plaintiffs cited no fewer than three court cases demonstrating that tests to determine whether diems should be factored into overtime pay rates and whether per diems should be taxable are not coextensive. In other words, a ruling on one issue doesn’t necessarily affect a ruling on the other issue.
Essentially, these are two separate issues for two separate courts. According to court documents, both the Plaintiffs’ expert witness and the Defendants’ expert witness concurred that the outcome of this particular lawsuit would not dictate the tax treatment of the per diems. Instead, the IRS would, “look to separate rules and criteria to make such determinations.”
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Moreover, the judge requested a supplemental briefing on this issue to gather more information. Based on that, the judge agreed with the plaintiffs. Altogether, this is interesting because one would think the two tests would have a direct affect on one another if the issue was cut and dry.
IRS Regulations Allow Hourly Per Diems in Rare Circumstances
Finally, the expert witness for the staffing companies testified that if the court finds that the agencies tied per diems to hours worked in this case, then it could encourage the IRS to take a similar position. The expert went on to argue that if the IRS took such a position, then the reimbursements would be taxable.
Here again, the judge sided with the plaintiffs. They cited several cases (an example here) in which the IRS was prevented by the IRS’s own tax codes from making such a determination. Specifically, 26 C.F.R. section 1.62(d)(3)(ii) is an IRS regulation governing accountable plans. It provides that “a per diem allowance for travel expenses” may be “computed on a basis similar to that used in computing the employee’s wages or other compensation” such as by “the number of hours worked” and still satisfy the business connection requirement, provided that, as of December 12, 1989, either (1) “a per diem allowance computed on that basis was commonly used in the industry” or (2) “the per diem allowance was identified by the employer either by making a separate payment or by specifically identifying the amount of the per diem allowance.”.
It’s interesting to note that the judge in this case cited this provision when he noted that the tax regulations “permit Plaintiffs, the Class, and [defendant] to argue that, even if included in the regular rate for purposes of FLSA, the per diems nonetheless satisfy the accountable plan requirements.” It’s also interesting to note that the expert witness for the staffing companies conceded that he had not taken this exception into consideration.
Denied Inclusion in Class Action Notice
Ultimately, the court granted the class action status in this case. The next step in the process was for the two parties to decide on the content of the Class Action Notice. This is the notification that lawyers send to all potential participants. As you might expect, the two sides could not come to an agreement. Therefore, both sides submitted their desired content to the court.
The defendants wanted to include information regarding the potential tax consequences for participating in the case. Essentially, they wanted to include the same tax related information they provided the court when they tried to prevent the class action status.
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The court denied the defendants’ request. In fact, the court said the defendants’ proposal “was not appropriate” and called it “argumentative.” However, the court did add a statement suggesting that class members may wish to consult a tax professional regarding any potential tax consequences of the lawsuit.
So, what does all this tell us about the tax implications of travel healthcare companies tying per diems to hours worked? It appears as though this issue is unsettled at least as far as the travel healthcare industry is concerned. That’s because IRS regulation 26 C.F.R. section 1.62(d)(3)(ii) appears to allow companies to tie per diems to hours worked IF doing so was a common practice back in 1989.
As the court stated, “As the record stands now, there is no evidence whether this exception could apply to [the agency’s] per diems.” Moreover, the court also asserts that this regulation could be used in any party’s defense should the IRS attempt to deem the per diems taxable.
It appears as though the main question is whether agencies commonly tied per diems to hours worked back in 1989. The industry got its start back in the late 70s so it has certainly been around long enough. We can verify that it was a common industry practice as far back as 1999. In fact, we’d be surprised if wasn’t common industry practice in 1989.
All that said, it’s clear that the issue is unsettled. Therefore, it is certainly possible that the IRS and courts rule the other way.
It’s also fair to say that agencies and travelers would be in the clear on this one tax-related issue if agencies did not apply hourly treatment to per diems in any way. However, both parties would have to be prepared for the consequences. It would most likely mean that agencies would spread the cost of missed-hours across all of their travelers’ pay packages instead of dealing with the issue on an individual basis. Of course, that would mean a reduction in pay rates for travelers, offset by the fact that agencies would pay per diems for missed shifts.
If you or anyone you know has firsthand experience with this issue dating back to 1989 or earlier, then we’d love to hear from you. Or course, we’d also love to hear about any additional information you might have about this topic. Please contact us or share in the comments sections below!
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