This section answers frequently asked questions (FAQs) about Section 105 Plans.
A Section 105 Plan allows tax-free reimbursement of medical and insurance expenses, as allowed under Section 105 of the Internal Revenue Code (IRC).
The term “Section 105 Plan” can refer to any health benefit that reimburses medical and insurance expenses, as allowed under IRC Section 105. As such, there are a variety of types of Section 105 Plans including:
Self-Insured (or Self-Funded) Health Insurance Plans
Section 105 Medical Reimbursement Plans, including:
Health Reimbursement Accounts (HRAs)
Health Reimbursement Plan (HRP)
Medical Expense Reimbursement Plan (MERP)
In this guide on Section 105 Plans, we’ve focused on Section 105 Medical Reimbursement Plans.
With the right Administration Software, a Section 105 Medical Reimbursement Plan takes less than 5 minutes per month to administer online. Companies use the software to add approved reimbursements to payroll. There are no time-consuming annual renewals, and employees maintain a direct relationship with the insurance company of their choice.
No. A Section 105 Plan is not health insurance. Rather, it is a vehicle used to reimburse medical and health insurance expenses tax-free, as allowed by Section 105 of the IRS code.
Healthcare expenses that may be reimbursed through a Section 105 Plan include qualified medical and health insurance expenses, as defined by the IRS (see IRS Publication 502).
No. Companies of all sizes can use a Section 106 Plan. Additionally, there are no required minimum participation requirements, and the company determines the eligibility requirements during implementation.
A small business can self-administer its own Section 105 Plan, but failure to comply with the minimum federal administration requirements is common without utilizing proper Section 105 Software. If a small business does not utilize proper administration software to fully comply with the Section 105 (IRS), ERISA, HIPAA, COBRA, and ACA regulations, the administrative cost likely outweighs the benefits. Fines for not complying with these regulations are costly. For these, reasons most companies do not self-administer their Section 105 Plan.
Some businesses might want to pay directly for an employee's individual health insurance plan without utilizing an ERISA- and HIPAA-compliant platform, but doing so may put the business out of compliance with federal regulations, and may increase the business’s (and employees’) tax liability. Specifically:
Paying for individual health insurance without a formalized Section 105 Plan causes the employer to "endorse" the individual health insurance plans (this violates ERISA).
Employers are not allowed to know the details of employees' HIPAA-protected medical expenses. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.
Paying for individual health insurance without a Section 105 Plan causes the payments to become taxable income to the employees.
Yes, a small business owner can participate in the business’s Section 105 Plan. However, whether or not owners are eligible to receive reimbursements 100% tax free depends on how the company files taxes, and the owner's status.
C-Corporation Owners: C-Corp owners may participate in a Section 105 Plan and receive all reimbursements 100% tax-free.
Sole Proprietors, Partners, or S-Corp shareholders that own >2% of the company's shares: These Non-C-Corp owners can use the Section 105 software platform to reimburse and track medical expenses. However, all reimbursements must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) and are subject to federal income taxes. Although, exceptions exist if the spouse is also a W-2 employee.
Additional questions on Section 105 Plans? Contact us. We’d be happy to help.