Out-of-pocket costs refers to expenses incurred by employees that require a cash payment. The employer typically reimburses employees for these costs through an expense reporting and check payment system. Examples of out-of-pocket costs are:
- The purchase of gasoline, parking, and tolls while engaged in company business
- The cost of a business lunch with a client
- The cost of a reward card given to an employee
The term has a more specific application in regard to health care expenses. In this case, an individual incurs out-of-pocket costs when required to pay a portion of the cost of health care to the health care provider. This includes deductibles and co-payments.
Conversely, all non-cash expenses, such as depreciation and amortization, are not considered to be out-of-pocket costs. Further, major expenditures such as for fixed assets, or planned expenditures such as for invoices submitted by suppliers are not considered to be out-of-pocket costs.