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Small Business Employee Benefits and HR Blog

Section 105 Health Reimbursement Plans (HRPs)

Section 105 of the IRS code allows small business owners to setup Health Reimbursement Plans (HRPs) to pay for healthcare expenses tax-free. With a Section 105 health reimbursement plan, an employer can reimburse an employee for healthcare and insurance expenses. These can be expenses incurred by the employee or his or her dependents, but they must be allowed under the plan document, which is created by the employer and outlines the expenses eligible for reimbursement.health reimbursement plans

Section 105 health reimbursement plans are often Health Reimbursement Arrangements (HRAs), but not all HRPs are HRAs. HRAs have specific requirements outlined in Notice 2002-45. If the HRP is not structured to have a plan-wide maximum benefit and rollover, it is not an HRA.

Many businesses use these plans as their sole employer-sponsored health coverage. A businesses might also use a Section 105 health reimbursement plan as a supplement to traditional employer health insurance to reimburse deductibles, dental or vision.

Advantages of Section 105 Health Reimbursement Plans

Section 105 health reimbursement plans offer several advantages to both the employer and the employees. The employees are given greater control over the health plan they choose, and the money used to reimburse them is not considered taxable income. Hence, employees can save 20-40% on health insurance when compared to paying with post-tax dollars, depending on how much he or she pays in taxes. 

In the same vein, employers deduct reimbursements as a business expense and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%). Employers have enormous flexibility and control with 105 health reimbursement with regard to establishing maximum reimbursement amounts and setting eligibility requirements via the plan document.

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How to Set up a Section 105 Health Reimbursement Plan

Section 105 health reimbursement plans are actually quite simple in practice:

  1. The employer must establish a formal written Section 105 health reimbursement plan (See plan document requirements).

  2. The employer determines the amounts available to each employee for reimbursements during a period of coverage (generally a year). 

  3. As eligible expenses are submitted, the employer reimburses the employees (100% tax-free) up to the available amounts. 

  4. Unused funds at the end of the year are typically carried over to the next year, but the employer can set those stipulations.

Administering a Section 105 Health Reimbursement Plan

Can a business self-administer a Section 105 health reimbursement plan? The short answer is yes, but it is virtually impossible for a business to stay in compliance without proper administration software. A primary reason for using compliant Section 105 administration software is that many employers will otherwise overlook important compliance obligations that put them at risk financially. Failure to comply with the following requirements can cost an employer thousands of dollars per day in fines:

  1. HIPAA Privacy
  2. IRS Rules
  3. ERISA Rules
  4. Medicare Reporting
  5. Legal Plan Documents
  6. COBRA (if applicable)
  7. New Affordable Care Act (ACA) Requirements

There are many additional benefits of using an administrator versus self-administration, such as online claim submission and processing, integrated plan documents, and different allowances by class of employee.

Similar Plans to Section 105 

It is important to note that there are many different terms that are synonymous with Section 105 health reimbursement plans. Some common terms you might hear are:
  • Health Reimbursement Arrangement
  • Health Reimbursement Account
  • Health Reimbursement Plan
  • Medical Expense Reimbursement Plan
  • Medical Reimbursement Plan
  • Section 105 Plan
What questions do you have?
Small Business Guide to Section 105 Medical Reimbursement Plans

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