Offering to help employees with their out-of-pocket medical costs, such as prescriptions, doctor visit co-pays, and deductible expenses, is common for small businesses - especially if you are not offering traditional health insurance coverage.
In the past, the go-to way for small businesses to reimburse employees tax-free was with a Section 105 Plan, such as an HRA, MERP, or HRP. With new Obamacare rules, however, a common question we receive from small business owners is, “Can we still use a Section 105 Plan to help employees with out-of-pocket medical costs?”
In this article, we’ll answer frequently asked questions about how to use Section 105 Plans, and other types of tax-free reimbursement plans, to help employees with out-of-pocket medical expenses.
What are Section 105 Plans?
A Section 105 Plan allows tax-free reimbursement of medical and insurance expenses, as allowed under Section 105 of the Internal Revenue Code (IRC). Common types of Section 105 Plans are Medical Reimbursement Plans, such as a Health Reimbursement Arrangements (HRA) or Healthcare Reimbursement Plans (HRPs).
Can Section 105 Plans Reimburse Out-of-Pocket Medical Expenses?
The short answer is it depends on which type of Section 105 Medical Reimbursement Plan you use.
Currently, employers can use these types of Section 105 Medical Reimbursement Plans to reimburse employees’ out-of-pocket medical expenses:
Integrated HRAs can reimburse out-of-pocket medical expenses, but the HRA must be linked to a group health insurance plan.
Retiree HRAs can reimburse individual health insurance premiums and out-of-pocket medical expenses for employees in retirement.
One-person Stand-alone HRAs can reimburse individual health insurance premiums and out-of-pocket medical expenses.
Currently, employers can generally not use these types Section 105 Plans to reimburse out-of-pocket medical expenses:
Stand-alone HRAs with more than two participants. This type of HRA is generally not compliant with the Affordable Care Act Market Reforms.
Healthcare Reimbursement Plans (HRPs) can reimburse individual health insurance premiums and preventive care only, but not other out-of-pocket medical expenses.
What About Other Reimbursement or Tax-Free Savings Accounts?
In addition to Section 105 Plans, there are other reimbursement vehicles that may be used for out-of-pocket medical expenses. The two main types are:
Health Savings Accounts (HSAs)
Flexible Spending Accounts (FSAs)
For a comparison of the different types of medical reimbursement plans, see this overview.
With the new Affordable Care Act rules, there are only limited situations where Section 105 Medical Reimbursement Plans can be used to reimburse employees’ out-of-pocket medical expenses. However, other reimbursement plans such as HSAs and FSAs are available plans to give your business and employees tax savings on healthcare.
What questions do you have about using Section 105 Plans to reimburse out-of-pocket medical expenses? Leave a comment. We’ll help answer them.