When a deal is made between two businesses or companies, a certain monetary transaction is made between the parties. If there is some problem with the transactions or some changes in the deal, one of the two parties, the buyer, can request the money back from their purchase. This compensation of the already made transaction is called a reimbursement. If you are someone who is interested in business or investments, reimbursement is one of the terms that you must be familiar with.
What is Reimbursement?
A reimbursement is a compensation paid by an organisation or a company for any out-of-pocket investments made by an employee or an overpayment made by a customer or any other party that the company deals with. In simple words, reimbursement is money you get back from a previous transaction you have made while buying something for yourself or making a payment on behalf of a third party.
You can experience reimbursements in a lot of your day-to-day activities and purchases that you make. This term is a lot like the term refund and is also fairly similar to it in nature, given that both these terms refer to getting your money back from a previous transaction. The main difference between the two terms is that refunds are usually done if the customer is not satisfied with the purchased items or if the items are damaged. In contrast, reimbursement is made when that person did not make the original payment or when the transaction has some error like overpayment.
Some common examples of reimbursements are reimbursements of business expenses like travel or food expenses, reimbursements made by insurance companies to the insured person for their medical bills, or reimbursements made to a person who makes a purchase on behalf of a third party. Reimbursements are also made in the form of tax refunds by the government in case of over-taxation. As opposed to any other compensation, reimbursements are not subject to any taxes.
Companies have set policies to decide when and how they will reimburse the out-of-pocket expenses made by the employees, including all types of expenses that are not covered in the employee's salary, including travel, food, ground transportations, hotels, and many more. Depending on the individual policies of companies which may change from one company to another, the reimbursements may also include some other expenses like tuition or college fees for continuing their education. All organisations that offer reimbursements have to ensure that the reimbursements made are for valid and legitimate reasons.
What are the different types of Reimbursement?
Now that we have seen what reimbursement stands for and know why it is important for any business, let's discuss the different types of reimbursements that are out there. There are three main types of reimbursements—insurance reimbursement, tax reimbursement, and legal reimbursement. To understand all three types a little better, let's go through them one by one.
1. Insurance Reimbursement
Reimbursement goes way beyond the business expenses and can also be used in the field of insurance. When an insured person or policyholder needs immediate medical attention and does not have much time to get in touch with the insurance company, the person has to pay for the medical bills themselves. They can then file for reimbursement from the insurance company.
Depending on what the insurance policy covers, the insurance company will provide the reimbursement to the insured. In some cases, the insurance company might want the insured to pay for certain medical bills on their own before filing for the reimbursements. This is most commonly the case with fitness reimbursements. In fitness reimbursements, the insurance company will make reimbursement of a certain amount to the insured if they participate in a fitness program at a recognised fitness center.
In simple terms, if you have an insurance policy and pay out of pocket for your emergency medical bills, you can later seek reimbursement from the insurance company to compensate for the expenses covered under the insurance policy.
2. Tax Reimbursement
After business expenses and the insurance industry, reimbursements are also fairly common in taxation. The government provides such reimbursements in taxes to the taxpayers on overpaid taxes. If a taxpayer pays an extra amount on the tax in the form of the TCS, which means Tax Collected at Source or TDS, which means Tax Deducted at Source, they can seek reimbursement on this extra amount paid them. The reimbursement or tax refund can be demanded at the time of filing the Income Tax Return or ITR. This reimbursement will then be provided to the taxpayer in the form of a tax refund. We call this a tax reimbursement because it is returned as compensation for an overpayment that was previously made.
3. Legal Reimbursement
Reimbursement is also common in the legal sector and can be seen in the form of reimbursement alimony. A judge offers this type of reimbursement to an ex-spouse after the couple's divorce. This is compensation for the time and money that the spouse has invested in the financial growth of the other spouse. In a divorce settlement, a person who works full time to support their partner's financial needs and education can seek reimbursement alimony if the partner is now financially independent.
Any business organisation, insurance company, or even the government that provides reimbursement has to make sure that the reimbursement is made for legitimate reasons. This can be done by carefully verifying the reimbursements that the employees or the taxpayers file as they can file for an expense that never occurred or increase the value of the expense. Such fraudulent cases can mostly occur in the banking sector. Therefore, companies need to have a strict policy against such frauds and need to achieve proper internal control to assess the reimbursement requests before providing the reimbursements.