Section 105 plans play a huge role in the employer-sponsored health insurance market, particularly in self-insured plans.
Self-insured Section 105 medical reimbursement plans offer dynamic, cost-effective, and sustainable employee benefits options. As such, they're a popular alternative to traditional group health insurance.
That being said, there seems to be some misunderstanding about IRC Section 105 and its application in the employer sponsored health insurance market.
This article provides a simple, to-the-point overview of IRC Section 105 and Section 105 Plans.
IRC Section 105 definition
IRC Section 105 is the section of IRS tax code that discusses amounts received under accident and health plans. IRC Section 105 allows qualified distributions from accident and health plans to be excluded from income (“tax-free”).
IRC Section 105 allows tax-free reimbursements for expenses incurred for medical care as defined in Section 213(d), including reimbursement for individual (personal) health insurance expenses.
These types of health plans are often referred to as section 105 plans.
How do people use Section 105 plans?
Self-funded (self-insured) health plans
A 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.
Section 105 medical reimbursement plans
Section 105 plans are also frequently found in the form of medical reimbursement plans. With a Section 105 medical reimbursement plan, a business would either:
Implement a Section 105 Plan alongside a conventional group health insurance plan (to reimburse deductible amounts not covered by insurance). This is also called a group coverage HRA, linked HRA, deductible HRA, or group HRA.
Implement a section 105 plan as a stand-alone medical reimbursement plan, used to reimburse employees for individual health insurance premiums. Currently compliant Section 105 HRAs include:
The qualified small employer HRA (QSEHRA): With the QSEHRA, small businesses with fewer than 50 employees can offer a monthly allowance of tax-free money. Employees then purchase the health care that fits their personal needs, potentially including individual health insurance policies, and the business reimburses them up to their allowance amount.
The one-person stand-alone HRA: This HRA works much like the QSEHRA, though it may only be offered to one employees. It also has fewer guidelines on items like annual contribution limits.
The retiree HRA: This HRA also follows the QSEHRA model, though it's offered only to retired employees. Like the one-person stand-alone HRA, it doesn't come with as many limits as the QSEHRA.
Other Section 105 plans
There are many different types of arrangements that fall within the umbrella of section 105 medical reimbursement plans. Some common terms you might hear are:
Health Reimbursement Arrangement
Health Reimbursement Account
Healthcare Reimbursement Plan
Medical Expense Reimbursement Plan
Medical Reimbursement Plan
Section 105 Plan
This blog was originally published in 2014. It was last updated November 25, 2020.
What questions do you have about Section 105 Plans? Leave a comment below.
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