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