What is a Section 105 Plan?

by | Dec 7, 2022 | Business Taxes

Section 105 Plans for Medical Expenses

Section 105 Plans: Everything You Need to Know About Saving on Medical Expenses With Tax-Free Reimbursement

What is a Section 105 plan?

A Section 105 plan is a health benefit offered by some employers that allows them to reimburse you for medical and insurance expenses tax-free. It is called a Section 105 plan because Section 105 of the Internal Revenue Code describes this type of plan.

How do employers use Section 105 plans?

Employers can use these tax-exempt plans in several ways. One of the most common ways employers use the Section 105 plan is to set up a self-funded benefit, where they reimburse employees for their qualified health expenses rather than paying premiums to an insurance agency.

How does a Section 105 medical reimbursement plan work?

There are a few straightforward steps to setting up a Section 105 plan. First, the employer needs to write up a formal Section 105 plan. In this plan, the employer will determine the allowance (monthly or annual) that they will provide each employee during the period of coverage. The standard period of coverage is typically one year. 

During the year, employees will submit their eligible expenses for reimbursement, and the employer will review them to ensure eligibility. Sometimes employers will outsource that step to an outside administrator or even a software package. The employer then reimburses the employees for the eligible expenses at a rate of 100%—tax-free—up to the allowance cap.

What are the different types of Section 105 plans?

Section 105 plans can go by a few different names. You may have heard them referred to as an HRA, a MERP, or an FSA. Each of these accounts is very similar. Below, we’ve explained the differences in each type of plan:

  • Health Reimbursement Arrangements (HRAs) – An HRA is an employer-funded health benefit–approved by the IRS—that is used to reimburse employees for their healthcare expenses. This reimbursement is tax free and includes things like health insurance premiums and out-of-pocket medical expenses.
    • Qualified small employer HRA (QSEHRA) – A QSEHRA is essentially a “Small Business HRA.” Small businesses with less than 50 full-time employees can offer a QSHERA to their employees.
    • Individual coverage HRA (ICHRA) – A ICHRA is a Section 105 plan that business of all sizes can use. With an ICHRA plan employees can choose their own health insurance policy through a broker or an online site, or keep an existing policy. This allows them to choose the individual health insurance coverage with the best combination of doctors, services, and premiums for their specific needs. 
    • Group coverage HRA (GCHRA) (also known as an integrated HRA) – An integrated or group coverage HRA is a health reimbursement plan that is designed to work alongside an existing group health insurance plan. Many employers that use a High Deductible Health Plan will also offer an integrated HRA to help employees manage the high deductible expenses with tax-free dollars.Rather than a pre-funded account, an integrated HRA is a tax-free reimbursement method for employers to cover the eligible healthcare expenses that aren’t fully paid for by the group plan, such as a deductible expense, coinsurance, and copayments.
    • Excepted benefit HRA (EBHRA) – An EBHRA is a plan to specifically covers expenses that are considered by the IRS to be “excepted benefits.” Under the Affordable Care Act, “excepted benefits” are benefits that aren’t included in traditional health insurance plans. Excepted benefits are things like accident-only coverage, disability insurance, workers compensation insurance, dental care, vision care, and other supplemental health benefits. In 2021, the annual limit for eligible excepted benefits was $1,800. 
    • Medical expense reimbursement plans (MERPs) – A MERP is essentially the same as a standard HRA/Section 105 plan.
    • Flexible Spending Accounts (FSAs) – A Health FSA is also a standard HRA under another name. 

What are the benefits of a Section 105 plan?

The biggest benefit of a Section 105 plan is cost savings. There are typically two distinct ways an employer can save by using this type of plan:

Cost savings

A Section 105 plan can deliver cost savings versus a traditional group health insurance plan because employers reimburse employees for health benefits rather than paying premiums to an insurance company. By cutting the insurance company out of the loop, employers can save the profit margin that an insurance company adds. In addition, employers can control their allowance amounts. 

Tax savings

When an employer uses a Section 105 plan, all reimbursed medical expenses are tax-free. That means both employers and employees are exempt from paying taxes on the money used to pay those expenses.  and employees don’t have to pay taxes on reimbursed expenses. 

Business entities like LLCs, C-Corps, and partnerships can take a full tax deduction of Section 105 expenses as long as they meet the requirements.And they don’t have to offer a Section 105 plan as a standalone benefit. Even if they are also offering a group health plan, employers can also offer a Section 105.

What are the cons of a Section 105 plan?

Section 105 plans can be an excellent option for many types of organizations, but they do have cons you should consider:

Unfamiliar benefits plan can create confusion

Many employees may have limited experience with Section 105 plans, and may be confused or off put by the reimbursement process. 

Additional compliance regulations

Section 105 plans come with a significant compliance and reporting burden since they must comply with a host of federal and state rules. If you need help understanding your regulatory requirements, our experts can help. Schedule a free consultation to talk about your specific needs today!

Some business owners cannot take advantage of tax benefits

Each type of business has different rules about their participation in Section 105 plans. For more information and guidance on whether your business could benefit from a Section 105 plan, reach out to one of our tax experts.

Frequently Asked Questions About Section 105 Plans

What can a Section 105 plan reimburse?

Section 105 plans can reimburse eligible medical expenses such as insurance premiums and out-of-pocket medical expenses. For a complete list of current elligble medical expenses, review IRS Publication 502. 

Is a Section 105 reimbursement plan considered health insurance?

A Section 105 plan is not considered health insurance, but it is considered a “group health plan” that meets the minimum essential coverage for applicable large employers. 

Can I have a Section 105 plan and an HSA at the same time?

Yes – you can have both types of plans, but you will be subject to unique rules about reimbursability. Our experts can help you navigate this – reach out for a free consult!