Over the past few years, you may have heard about a Section 105 Plan.
And while you may know little-to-nothing about this type of Plan, it’s important for you to understand what it is. Why? As a small business owner, whether you’re currently offering a group-sponsored health insurance plan, or nothing at all, a Section 105 Plan could be a great benefit to you and your employees.
So, what is the difference between a Section 105 Plan and a group-sponsored health insurance plan? This article will help you better understand a Section 105 Plan, and more specifically a Section 105 Medical Reimbursement Plan, and how it differs from other health benefits such as a group-sponsored health insurance plan.
A Simple Breakdown
To better help you understand the difference between a Section 105 Medical Reimbursement Plan and a group-sponsored health insurance plan, it’s important to know each plan its basic form.
What is a Section 105 Medical Reimbursement plan?
A Section 105 Medical Reimbursement Plan is an employer-funded health benefit. The employer sets the specific amount contributed (but doesn't dictate the exact health benefit).
What is a group-sponsored health insurance plan?
With a group-sponsored health insurance plan the employer sets the specific health benefit (vision, dental, life insurance, etc.)
To better understand how these differ, let’s take a closer look at each one.
Section 105 Medical Reimbursement Plan
A Section 105 Medical Reimbursement Plan is a new way to think about employer health insurance. In it's purest form, a company provides its employees with a health insurance allowance or "contribution" to spend on their own individual health insurance -- at an annual cost that the company controls -- rather than providing the actual health insurance plolicy.
Think of a Section 105 Medical Reimbursement Plan as a stipend, or a gift card, to use for health insurance. The benefit is administered through a reimbursement software provider to comply with various federal rules.
To help you better understand a Section 105 Medical Reimbursement Plan, here are this type of Plan’s pros and cons.
Flexibility: Section 105 Medical Reimbursement Plans are highly flexible for employers. They can be designed to meet your budget, health benefit, and hiring needs. You decide how much you want to contribute to the employees’ healthcare reimbursement allowance. You can distinguish different benefits for different classes of employees, as well.
Cost control: You own the funds and the Plan is entirely employer-funded. Reimbursements are only issued to your employees once they show proof of a valid medical expense.
Cost savings: A Section 105 Medical Reimbursement Plan allows you to deduct reimbursements as a business expense and exclude them from wages. Employees will save 20-40 percent on medical expenses by using pre-tax dollars rather than after-tax dollars.
Limited tax benefits for some owners: Some types of business owners receive limited tax benefits from reimbursements through a Section 105 Medical Reimbursement Plan.
Employer must comply to avoid fines: Section 105 Plans are subject to compliance rules, which, if not followed can result in costly fines. To make sure your arrangement is compliant, and to make compliance easy, use a Section 105 software administrator.
Group-Sponsored Health Insurance Plan
A group-sponsored health insurance plan is the traditional way we think about employer health insurance. A company provides its employees with a defined healthcare benefit -- doctor visits, hospitalization, pharmacy and so on -- often at uncertain annual cost.
The benefit is administered through an employer-sponsored group health benefits plan.
To help you better understand a group sponsored health insurance plan, here are this type of plan’s pros and cons.
Plan options: You can research available plans, pick the insurance company, and pick plan options for employees.
Coverage guarantee: Coverage is guaranteed-issue for employees, meaning there is no individual underwriting.
Rate changes: The employer health insurance rates are re-negotiated each year based on the group's previous year's health care costs.
Minimum participation requirements: There are certain requirements for minimum participation. The employer can share the cost of the premium with employees, but there are minimum contribution amounts for the employer.
Now, knowing some of the details of a Section 105 Medical Reimbursement Plan and a group-sponsored health insurance plan, how do they differ?
A Section 105 Medical Reimbursement Plan is where an employer defines how much they want to contribute to an employees’ individual health insurance premium as a benefit. A group-sponsored health insurance plan is when an employer defines which benefits their employees will have under a group health insurance policy.
Which type of plan fits your small business best as a health benefit? Comment below.