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Small Business Employee Benefits and HR Blog

Section 105 Plan vs. Section 125 Cafeteria Plan - What’s the Difference?

To control healthcare costs, employers are using tax-advantaged medical spending or reimbursement accounts. In fact, these types of account-based health plans are on the rise. As companies evaluate using a Health Reimbursement Account, Health Savings Account, or Healthcare Reimbursement Plan, two terms are often thrown around - a Section 105 Plan and a Section 125 Cafeteria Plan” Section 105 v Section 125 Plans

Is there a difference between a Section 105 and Section 125 Plan? Yes. What is the difference? Read on.

Note - This topic was asked about during our recent webinar, Can Tax-Free Premium Reimbursement Work for You? If you'd like to download the on-demand webinar and slides, click here.

Section 125 Cafeteria Plan

Most people are familiar with a Section 125 Cafeteria Plan. Perhaps you don’t know it by name, but if you’ve received health insurance through work, you’ve likely used one.

A Cafeteria Plan (see Section 125 of the IRS Code) is a benefit provided by an employer which allows an employee to contribute a certain amount of his or her gross income to a designated "account" before taxes are calculated. This "account" can be used to reimburse the employee for certain types of insurance premiums, medical, or dependent care expenses throughout the plan year or claim period as the employee incurs qualified expenses.

It is called a Cafeteria Plan because, much like choosing from a menu, an employer may provide a selection of benefits from which the employee can choose from.

Related: How Section 125 Cafeteria Plans Work

Common examples of Section 125 Cafeteria Plans include:

  • Contributions to a Health Savings Account (HSA)

  • Health Flexible Spending Accounts (FSAs)

  • Premium Only Plans (POPs)

  • Dependent Care Flexible Spending Accounts

To summarize, under Section 125 of the IRS Code, a Cafeteria Plan offers a way for employees to pay for qualified contributions to insurance premiums and medical spending accounts with pre-tax dollars.

Section 105 Plan

Next, there are Section 105 Plans. Section 105 Plans are named after the tax-code (IRC Section 105) that allows tax-free reimbursements for expenses incurred for medical care as defined in Section 213(d), including reimbursement for individual health insurance expenses.

Section 105 Plans are employer-funded and are used in a variety of ways. For example, common examples of Section 105 Plans include:

To summarize, Section 105 Plans offer a way for employers to provide employees tax-free reimbursement for qualified medical and health insurance expenses.

Conclusion

Section 125 Cafeteria and Section 105 Plans are similar; they are both tools employers use to allow for pre-tax contributions to medical and health insurance expenses. However, there are also key differences in structure, funding, and qualified healthcare expenses.

Do you have additional questions about the difference between Section 125 and Section 105 Plans? Leave a question below. We’d be happy to answer.

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