What is a Section 105 Plan?

A Section 105 Plan allows tax-free reimbursement of medical and insurance expenses, as allowed under Section 105 of the Internal Revenue Code (IRC).

Section 105 Plans are used by employers in a variety of ways. For example, a common type of Section 105 Plan is a self-funded (or self-insured) health plan, where the employer self-funds (or self-insures) health benefits rather than pay premiums to an insurance company.

Section 105 Plans are also frequently found in the form of Medical Reimbursement Plans such as Health Reimbursement Arrangements and Health Reimbursement Plans.

In this guide we will discuss both types of Section 105 Plans, with a focus on Section 105 Medical Reimbursement Plans. We invite you to explore the topics outlined in the navigation bar.

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Section 105 Plan Resources

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Pros and Cons of Section 105 Plans

When evaluating Section 105 Plans, there are pros and cons to consider for your company and employees. This section outlines pros and cons of Section 105 Plans, focusing on Section 105 Medical Reimbursement Plans.

Section 105 Medical Reimbursement Plans - ProsSection_105_medical_reimbursement_plan_pros_cons

Section 105 Medical Reimbursement Plans offer several advantages to both the employer and the employees.

Flexibility

Section 105 Plans are extremely flexible for employers - you can design the Plan in a variety of ways to meet your budget, health benefit, and hiring needs. For example, employers decide the amount to contribute to employees' healthcare reimbursement allowances and can offer different benefits to different classes of employees. As long as the Section 105 Plan is in compliance, there are many plan design options available.

Cost Controls

With Section 105 Plans, the employer owns the funds and the Plan is entirely employer-funded. Section 105 reimbursements are only issued to employees once they show proof of a valid medical expense. Additionally, when the employee terminates employment, any unused funds generally stay with the employer.

Cost Savings

Using a Section 105 Plan reduces the amount of FICA and FUTA tax an employer pays. Employers can deduct reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%). Additionally, employees save 20-40% on medical expenses by using pre-tax dollars rather than after-tax dollars. And, reimbursements are generally excluded from employees' gross income.

Recruiting Retention

Many businesses struggle to find affordable health insurance. Because of the cost savings and predictability, Section 105 Plans help employers offer more robust health benefits. This is a big bonus for recruiting and retaining key employees.

section-105-plan-eBook

 

Section 105 Medical Reimbursement Plans - Cons

The cons of Section 105 Medical Reimbursement Plans are:

Change in Benefits Administration

Offering a Section 105 Plan is a different approach for some employers and employees. As such, some employers perceive administration as a con of offering a Section 105 Plan. With the wrong administrator this can be true. What's the workaround? Use an online administration software to alleviate this. With the right Section 105 software, administration takes 5-10 minutes a month.

Limited Tax Benefits for Some Owners

Some types of business owners receive limited tax benefits from reimbursements through a Section 105 Plan. Read more on owner participation in Section 105 Plans .

Employer Must Comply to Avoid Costly Fines

Section 105 Plans are group health plans and are subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules. As such, some employers perceive compliance as a con. To make sure your arrangement is compliant, and to make compliance easy, use a Section 105 software administrator.

Use Cases for Section 105 Plans

This section provides an overview of how Section 105 Plans are used.

How Section 105 Plans are UsedHow_section_105_medical_reimbursement_plan_used

There are two main ways employers use Section 105 Plans.

1. Self-Funded (Self-Insured) Health Plan

A common type of Section 105 Plan is a self-funded (or self-insured) health plan, where the employer self-funds (or self-insures) health benefits rather than pay premiums to an insurance company.

Employers choose to self-insure because it allows them to save the profit margin that an insurance company adds to its premium for a fully-insured plan. However, self-insuring exposes the company to much larger risk in the event that more claims than expected must be paid.

2. Section 105 Medical Reimbursement Plan

Section 105 Plans are also frequently found in the form of Medical Reimbursement Plans such as Health Reimbursement Arrangements and Health Reimbursement Plans .

With a Section 105 Medical Reimbursement Plan, an employer would either:

  • Implement a Section 105 Plan alongside a conventional group health insurance plan (to reimburse deductible amounts not covered by insurance). This is also called an integrated HRA, linked HRA, deductible HRA, or Group HRA.

  • Implement a Section 105 Plan as a stand-alone Medical Reimbursement Plan, used to reimburse employees for individual health insurance premiums. This is often called a Health Reimbursement Plan (HRP), Premium Reimbursement Arrangement, or Self-Insured Medical Reimbursement Plan.

To summarize, a Section 105 Medical Reimbursement Plan is:

  • 100% employer-funded

  • Tax deductible to the business and tax-free to employees

  • Like a business expense account for health insurance premiums and/or medical expenses

Note: A Section 105 Plan is not health insurance. Rather, it is a vehicle to reimburse employees for medical and individual health insurance expenses.

How Does a Section 105 Medical Reimbursement Plan Work?

Section 105 Medical Reimbursement Plans are actually quite simple in practice:

  • The business must establish a formal written Section 105 plan (See: Section 105 Plan Design Requirements ).

  • The business determines the amounts available to each employee for reimbursements during a period of coverage (generally a year), and other terms of the Plan.

  • As employees submit eligible expense, the business reimburses the employees (100% tax-free) up to the available amounts.

Similar Plans to Section 105 Medical Reimbursement Plans

There are many different types of arrangements that fall within the umbrella of Section 105 Medical 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

  • Self-Insured Medical Reimbursement Plan

Tip: In this guide on Section 105 Plans we are focusing on Section 105 Medical Reimbursement Plans, which are often the foundation of Defined Contribution Health Benefits.

Design Requirements for Section 105 Plans

Section 105 Medical Reimbursement Plan Design Requirements

The following Section 105 Plan rules impact design, and are helpful to understand.

  • A Section 105 Plan is paid for solely by the employer and cannot be funded through employee salary deduction.

  • A Section 105 Plan may only reimburse employees during their effective dates in the plan.

  • A Section 105 Plan can reimburse for eligible medical expenses and health insurance premium amounts (see IRS Publication 502).

  • Each eligible healthcare expense must be substantiated.Section_105_medical_reimbursement_plan_design_requirements

  • Reimbursements are generally excludable from the employee's gross income under Internal Revenue Code Sections 106 and 105.

  • Section 105 Plans are considered group health plans, and as such, must be designed and administered to comply with the IRS, HIPAA, ERISA, COBRA, and the ACA. Read more on Section 105 Plan Compliance .

  • Section 105 Plan Documents are required.

Designing a Section 105 Medical Reimbursement Plans

Designing a Section 105 Medical Reimbursement Plan is simple. Here are questions to ask as you design a Plan:

  • What type of Section 105 Plan are we using? (See: Section 105 Use Cases )

  • When will the Plan start?

  • What allowance will we provide? Will we provide the same allowance to all employees, or offer different allowances based on employee class or family status?

  • What makes employees eligible for the benefit?

  • What categories of medical expenses will we reimburse?

  • Who will administer the Section 105 Plan?

  • Do we understand the compliance rules with the Plan?

Compliance Requirements for Section 105 Plans

Section 105 Medical Reimbursement Plans are considered group health plans. As such, they must comply Section_105_medical_reimbursement_compliancewith IRS, HIPAA, COBRA, ERISA, and the Affordable Care Act (ACA) rules.

This section details compliance requirements that may impact your Section 105 Plan.

Tip: Use a Section 105 Software Administrator to make compliance easy.

Internal Revenue Service (IRS)

  • Plan Documents: The IRS requires that written Plan Documents are established and maintained. Plan Documents define what expenses are eligible for reimbursement, the amount of employer contribution, and other required details about the reimbursement plan.

  • Documentation: The IRS requires that employees submit proper documentation verifying their claim for reimbursement, and that supporting documentation is saved on file for ten years.

  • Non-Discrimination: Section 105 Plans must comply with IRS nondiscrimination rules. The rules state the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.

Health Insurance Portability and Accountability Act (HIPAA)

  • HIPAA Privacy Rules : Section 105 Plans are governed by HIPAA Privacy Rules. In order to administer a Plan correctly, the entity processing employee reimbursement claims receives Protected Health Information (PHI) that is required to be held confidentially under HIPAA.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Only for plans with 20 or more participants

  • COBRA Compliance: Employers must give terminated employees the option to continue their participation in the Section 105 Plan for a period after termination, and may charge an employee up to 102% of the value of their allowance if COBRA is elected.

Employee Retirement Income Security Act (ERISA)

  • Summary Plan Description: Section 105 Plans are employee welfare plans under ERISA. ERISA requires every [welfare] plan to have a Summary Plan Description (SPD) and to furnish copies to each participant.

  • ERISA Compliance: The U.S. federal government has specific regulations employers must comply with in order to reimburse employees for individual health insurance premiums without triggering ERISA plan status for the individual health insurance policies. For example, the employer must not endorse specific individual health insurance policies or pay directly for them.

Patient Protection and Affordable Care Act (ACA)

  • Annual Limit Compliance: Section 2711 of the Public Health Services (“PHS”) Act, as added by the ACA, provides that no annual or lifetime limits may be placed on essential health benefits (“EHB”). PHS Act 2711 provides that annual limits and lifetime limits may be placed on benefits that are not EHB, such as health insurance premiums. Section 105 Plans must be designed to comply with PHS 2711.

  • Preventive Care Compliance: Section 2713 of the PHS Act, as added by the ACA, requires group health plans (including Section 105 Plans) to cover basic preventive health services without cost-sharing.

  • 90-Day Waiting Period Compliance: The ACA prohibits waiting periods over 90 days for eligible employees.

  • Internal and External Claims Appeal Process: The ACA added new requirements to the internal and external appeal process including how and when procedures are communicated to plan participants.

  • Dependent Coverage for Adult Children up to Age 26: Section 2714 of the PHS Act, as added by the ACA, provides that group health plans (including Section 105 Plans) that make available dependent coverage of children must make such coverage available for children until 26 years of age.

  • Uniform Explanation of Coverage and Definitions: The ACA requires that group health plans, participants, and beneficiaries receive a standardized summary of benefits and coverage (“SBC”) and a set of uniform definitions (“Uniform Glossary”), both of which must conform to requirements outlined in the ACA and existing regulations.

  • Form 720 Comparative Effectiveness Research (CER) Fee: The ACA includes a "research fee" that plan sponsors must pay on an annual basis annually via Form 720.

  • 60-Day Notice of Material Modification: The ACA requires employers to provide 60 days advanced notice to participants when making material modifications to their group health plan (including Section 105 Plans).

    Section 105 Plans Implementation Strategies

    This section outlines how to implement a Section 105 Medical Reimbursement Plan.

    How to Implement a Section 105 Medical Reimbursement Plan

    There are three simple steps to implement a Section 105 Plan.

    1. Complete Plan Setup Generate Plan Documents

    • Complete plan setup with your Section 105 software administrator.

    • Download and distribute required Plan Documents.

    2. Enroll EmployeesSection_105_medical_reimbursement_implementation_strategy

    • Enroll employees online.

    • Send Welcome Kits to employees (electronically or printed packets).

    3. Employees Submit Reimbursement Requests

    • Employees incur qualified healthcare expenses and submit proper documentation for reimbursement.

    How to Administer a Section 105 Medical Reimbursement Plan

    To administer a Section 105 Plan you need to:

    Businesses have three main options for plan administration:

    1. A traditional third party administrator ("TPA")

    2. An Administration Software provider

    3. Self-administration

    Because of compliance reasons, and for ease of use and time savings, most businesses use a third party to administer the plan.

    In the next section, we’ll discuss Section 105 Administration Software in more detail.

Administration Software for a Section 105 Plan

Can a business self-administer a Section 105 Plan? The short answer is yes, but it is virtually impossible Section_105_medical_reimbursement_plan_softwarefor a business to stay in compliance without Administration Software.

As such, primary reason for using 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:

  • HIPAA Privacy

  • IRS Rules

  • ERISA Rules

  • Medicare Reporting

  • Legal Plan Documents

  • COBRA (if applicable)

  • Affordable Care Act (ACA) requirements, including the new "Market Reforms"

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

Frequently Asked Questions about Section 105 Plans

This section answers frequently asked questions (FAQs) about Section 105 Plans.

What is a Section 105 Plan?

A Section 105 Plan allows tax-free reimbursement of medical and insurance expenses, as allowed under Section 105 of the Internal Revenue Code (IRC).

What are the Different Types of Section 105 Plans?

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.

How much time does it take a company to administer a Section 105 Medical Reimbursement Plan?

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.

Is a Section 105 Medical Reimbursement Plan Health Insurance?

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.

What type of healthcare expenses are reimbursable through a Section 105 Medical Reimbursement Plan?

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).

Is there a minimum or maximum number of participants that must enroll in a Section 105 Plan?

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.

Can I administer the Section 105 Plan myself?

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.

Can I pay for employees’ individual health insurance premiums without a 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.

Can a small business owner participate in a Section 105 Plan?

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.

Additional Reading on Section 105 Plans

Section 105 Medical Reimbursement Plans

Section 105 of the IRS code allows small business owners to pay for medical expenses tax-free. With a Section 105 medical reimbursement plan, an employer can reimburse an employee for medical and insurance expenses. >> Read more.

Section 105 Plans

This article provides an overview of Section 105 Plans including advantages, administration options, and how Section 105 Plans work. >> Read more.

FAQ: Can Owners Participate in Section 105 Medical Reimbursement Plans?

For small businesses using a Section 105 Medical Reimbursement Plan to reimburse employees for individual health insurance premiums, a common question is "can an owner participate in the Section 105 Plan?" >> Read more.

Why Section 105 Plans are Better Than Section 125 Plans (Post-2014)

This article examines why it's better to use a Section 105 plan post-2014. >> Read more.

Section 105 Medical Reimbursement Plans: FAQs

Here are the top three questions from small business owners about setting up a Section 105 Medical Reimbursement Plan. >> Read more.

What Health Insurance Premiums Can Section 105 Plans Reimburse?

It's becoming mainstream for small employers to offer defined contribution allowances instead of offering a small group health insurance plan. The most common way to set up the allowances is with a limited-purpose Section 105 medical reimbursement plan. So, what types of health insurance premiums can a Section 105 plan reimburse? >> Read more.

Section 105 Plan Document Requirements

A Section 105 Plan allows tax-free reimbursement of medical and insurance expenses. The Section 105 Plan Document describes the terms and conditions related to the operation and administration of the Section 105 Plan. >> Read more.

Section 105 Plan Eligibility - By Owner Status

A common question from business owners and one-person nonprofits is "am I eligible to participate in the Section 105 plan?" This article reviews Section 105 owner participation for various types of owners. >> Read more.

Section 105 Software - Health Insurance Expense Reimbursement via Payroll

The easiest way to offer health benefits today is with a Section 105 "Pure" Defined Contribution Plan. With the right Section 105 Software, employers can record tax-free health care reimbursements via their existing payroll service (e.g. Paychex, ADP, QuickBooks, etc.). >> Read more.

Section 105 Plan Rules Requirements

This article outlines Section 105 plan rules and requirements. >> Read more.

10 Questions to Ask Section 105 Plan Providers

This article outlines ten questions to ask when researching Section 105 Providers. >> Read more.

The Comprehensive Guide to the Small Business HRA