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Small Business Employee Benefits and HR Blog

Deciphering Section 105 Plans - Which Plan is the Best Fit?

March 6, 2015
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Section 105 Plans are a tool used by employers to reimburse employees for medical and health insurance expenses. There are a few different ways Section 105 Plans are used. So, which Section 105 Plan is the best fit for a small business? Let’s break it down.

What is a Section 105 Plan?

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

Deciphering Section 105 Plans

There two main ways Section 105 Plans are used.

The first 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. This is common among larger corporations.

The second way a Section 105 Plan is used is as a Medical Reimbursement Plan, such as Health Reimbursement Arrangements (HRAs) or Health Reimbursement Plans (HRPs). A Section 105 Medical Reimbursement Plan can either be used along-side a group health insurance plan (to reimburse deductible amounts not covered by insurance), or used as a stand-alone health benefit (to reimburse individual health insurance premiums).

As we wrote about previously, Section 105 Medical Reimbursement Plans are different than other health benefits plans because they reimburse eligible expenses, rather than providing a specific health insurance benefit. Think of them like a business expense account for health insurance premiums and/or medical expenses.

The Best Fit for Small Business

Deciphering Section 105 Plans - Which Plan is the Best Fit?

Now that you understand what Section 105 Plans are and common ways they are used, what is the best fit for a small business?

The answer is a Section 105 Medical Reimbursement Plan - used as a stand-alone benefit to reimburse individual health insurance.

The reason is that group health insurance is expensive - really expensive - for small businesses. It’s also restrictive and limited.

On the other hand, individual health insurance is more affordable and flexible.

A Section 105 Medical Reimbursement Plan (such as a Healthcare Reimbursement Plan) allows small businesses the opportunity to reimburse employees for their individual health insurance.

The result? Small businesses have a budget-friendly health insurance solution, and employees have greater choice of coverage.

Conclusion

Section 105 Medical Reimbursement Plans allow employers to reimburse individual health insurance. It’s this type of arrangement that is the best fit for small businesses looking to offer an affordable health insurance solution.

Questions about Section 105 Plans? Leave a comment below.

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