Instead of contributing to employer health insurance coverage, many smaller employers are setting up self-insured Section 105 Medical Reimbursement Plans to reimburse employees for individual health insurance coverage. This model of health benefits has increased in popularity as the individual health insurance market has gained traction.
A common question about self-insured Section 105 Plans is how they are impacted by the Affordable Care Act reforms (aka the ACA or Obamacare). The purpose of this article is to help small employers understand the basics of Section 105 Plans and the Obamacare rules they need to follow.
Note: As of January 2017, Zane Benefits is no longer offering self-insured Section 105 Plan administration tools. Instead, our product supports the Small Business HRA, a new compliant reimbursement arrangement specifically for businesses with fewer than 50 employees. We believe the HRA is a better product for small businesses than Section 105 Plans like the HRP due to clear compliance requirements and simplicity. Contact us for any questions.
Section 105 Plans - The Basics
A Section 105 Plan is a vehicle employers use to offer employees tax-free reimbursement of individual (personal) health insurance expenses.
The name “Section 105 Plan” comes from the section of the IRS code (IRC Section 105) that allows qualified distributions from accident and health plans to be excluded from income (“tax-free”). There are various ways Section 105 Plans are used. In this article, we are focused on Section 105 Medical Reimbursement Plans used for individual health insurance reimbursement.
In addition to understanding that a Section 105 Plan is a tax-free reimbursement vehicle, it is also important to understand that a Section 105 Plan is a group health plan.
As a group health plan, Section 105 Plans must follow group health plan rules, including:
IRS Plan Document and non-discrimination rules
Affordable Care Act Market Reforms and applicable administrative requirements (we’ll discuss these rules next)
ERISA rules for reimbursing individual health insurance policies, among other requirements
HIPAA privacy rules
COBRA, if applicable
So remember, a Section 105 Plan is a group health plan that allows for tax-free reimbursement of employees’ individual health insurance expenses. A Section 105 Plan, however, is not group health insurance coverage. These Section 105 Plan basics are important for understanding the Obamacare rules, which we’ll cover next.
Obamacare Rules for Section 105 Plans
Under Obamacare, group health plans must be designed and administered to comply with the Affordable Care Act (ACA) and associated regulations such as PHS 2711 (prohibition on annual limits) and PHS 2713 (preventive care) -- as well as numerous new administrative requirements.
Under these new Obamacare rules, Section 105 Plans (remember, a type of group health plan):
May not place an annual or lifetime limit on essential health benefits.
Must cover basic preventive care services without cost-sharing to the employee.
Must meet administrative and reporting requirements for group health plans.
A Section 105 Plan used for individual health insurance reimbursement is designed to meet these reforms by only reimbursing employees for individual health insurance expenses (not an essential health benefit), and basic preventive care as required by the reforms.
To meet the administrative and reporting requirements, most employers use a third-party reimbursement software or administrator to ensure compliance.
FAQ - Does a Section 105 Plan Satisfy the ACA Employer Shared Responsibility Payment (“Employer Mandate”) for Companies with >50 Full-Time Employees?
No. A Section 105 Medical Reimbursement Plan is not an “eligible employer-sponsored plan” (i.e. minimum essential coverage) and will not satisfy the Employer Mandate.
FAQ - Does a Section 105 Plan Satisfy the ACA Individual Shared Responsibility Payment (“Individual Mandate”) for Employees?
No. A Section 105 Medical Reimbursement Plan is not an “eligible employer-sponsored plan” (i.e. minimum essential coverage) and will not satisfy the Individual Mandate. To avoid the Individual Shared Responsibility Payment, employees need to be covered under a qualified health insurance policy. Employees can use their Section 105 Plan to be reimbursed for their premium, or a portion of their premium.
Under Obamacare, employers may continue to use Section 105 Plans as a vehicle for tax-free reimbursement of individual health insurance expenses so long as the plan complies with all applicable federal regulations. As a safeguard, many small employers work with a health insurance advisor and/or reimbursement software provider to ensure compliance.
What questions do you have about Obamacare and Section 105 Plans? Let us know in the comments below.