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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

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.

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