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We've updated one of our most popular materials. See what's new in our guide to MERPs.

A Guide to Section 105 Plans

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.


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 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.

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