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Small Business Employee Benefits and HR Blog

Section 105 Plan Rules & Requirements

This article outlines Section 105 plan rules and requirements.Section_105_Rules

What is a Section 105 Plan?

A Section 105 plan allows an employer to reimburse an employee for medical and insurance expenses incurred by the employee or his or her dependents.

The most 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.

However, Section 105 plans are also frequently found in the form of medical reimbursement plans.

For example, an employer might implement a Section 105 plan alongside a conventional employer-sponsored health insurance plan (to reimburse deductible amounts). This is also called an Integrated HRA.

Or, an employer might implement a limited Section 105 plan as a stand-alone benefit, used to reimburse individual health insurance premiums. This is often called a Healthcare Reimbursement Plan (HRP).

When discussing Section 105 plans in this article, we are focusing on Section 105 Plans used as a limited medical reimbursement plan (i.e. a Healthcare Reimbursement Plan or HRP). This type of Section 105 plan is often the foundation for "pure" defined contribution health benefits.

Section 105 Plan Rules & Requirements

To help understand the rules and requirements of Section 105 plans, here are ten (10) FAQs about how Section 105 plans are set up, administered, and offered to employees.

1. What are the basic requirements for setting up a Section 105 plan?

First, Section 105 plans are subject to ERISA so a legal Plan Document must be provided in writing (see Section 105 plan document requirements here).

Second, the Section 105 plan must be set up and administered to comply with various federal regulations. Nearly all employers use Defined Contribution Admin Software to stay compliant with the following rules and regulations:

  1. COBRA - A Section 105 plan is subject to COBRA rules
  2. HIPAA Privacy - A Section 105 plan is governed by HIPAA Privacy rules
  3. Medicare Reporting - A Section 105 plan is subject to Medicare Secondary Payer (MSP) provisions
  4. ACA - A Section 105 Plan must be designed and administered to comply with ACA and associated regulations such as PHS 2711 (prohibition on annual limits) and PHS 2713 (preventive care) -- as well as numerous new administrative requirements

2. Who owns the Section 105 funds?

According to IRS rules, the employer owns the Section 105 funds until they are expensed (reimbursed) to employees for eligible expenses.

3. Who can contribution funds to the Section 105 plan?

According to IRS rules, Section 105 plans are fully owned and funded by the employer.

4. Does the money in a Section 105 plan earn interest?

Typically, no. Under most Section 105 plan rules, the funds aren’t held in individually owned bank accounts that are eligible to earn interest.

5. What is an eligible health care expense for Section 105 plans?

Eligible expenses under a Section 105 plan are determined by the IRS in Publication 502. From this list of IRS-approved expenses, the employer can limit or specify types of expenses further. The employer specifies these eligible health care expenses in the Section 105 plan documents. For a limited Section 105 plan (used to reimburse health insurance premiums), eligible expenses include different types of health insurance premiums (see: What Health Insurance Premiums Can Section 105 Plans Reimburse?).

Eligible expenses must be incurred by the employee and/or eligible members of the employee’s family, take place within the benefit plan year, and meet any other requirements specified in the plan documents.

6. How much can be contributed to the Section 105 plan?

The amount contributed to the Section 105 plan is completely up to the employer, and specified in the Section 105 Plan Documents. Employers can offer the same monthly amount to all employers, or provide different benefit amounts to different classes of employees.

7. How are employees reimbursed?

With a Section 105 plan, reimbursements come directly from the employer to employee. Pre-funding of third-party accounts is not required. To be reimbursed, employees must first incur a qualified expense (ie: purchase health insurance with their own money). Then, employees submit a claim for reimbursement. Once the claim is approved, the employer is notified to reimburse employees for their eligible expense, up to the amount available in their balance. Using a defined contribution software provider makes this process very easy and quick for both employees and the employer. For example, many providers offer same-day review of claims.

8. What happens to funds in the Section 105 plan if employees leave the company?

Most often, the unused money stays with the employer when an employee is terminated or retires. Once again, the rules are specified in the Section 105 Plan Documents.

9. Do the funds employees have in their Section 105 plan roll over year to year?

This Section 105 plan rule is up to the employer, and what the employer can allow depends on how the Section 105 plan is being used (ex: with a group health plan or not). Most Section 105 plans are set up with no annual rollover to comply with health reform changes.

10. Are employees required to have health insurance to be enrolled in the Section 105 plan?

No. Employees are not required to have health insurance to be enrolled in the Section 105 plan. The employer may require employees to have health insurance before receiving reimbursement. However, not all employers require this. Read more about employee eligibility.

What questions do you have about Section 105 plan rules and requirements? Leave a comment and we'll add to this list.

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