As small businesses look into options for offering healthcare benefits to employees, many choose a Section 105 Plan as an alternative to employer-sponsored group health insurance. So, what is a Section 105 plan and how does it benefit your small business? We’ve put together a quick, comprehensive rundown to help you better understand this type of healthcare benefit.
Section 105 Plans Simplified
A Section 105 plan, in it’s simplest form, allows an employer to reimburse an employee for medical and insurance expenses. That’s not complicated, is it?
Example: In the case of a Section 105 Medical Reimbursement Plan (see below), employees choose and purchase their own individual health insurance and their employer reimburses them up to a specific monthly amount (i.e. $150) for their health insurance premium.
Overview of IRC Section 105
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 are Section 105 Plans Used?
There are two primary ways employers use a Section 105 Plan. Let's discuss each way.
Self-Funded (Self-Insured) Health Plans
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.
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 an Integrated 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. This is often called a Healthcare Reimbursement Plan (HRP) or ZaneHealth. Note: The Section 105 Plan must be designed to comply with the "Market Reforms" as outlined in IRS Notice 2013-54.
What are Advantages of Section 105 Plans?
Section 105 Plans are one of the only IRS-approved employee health benefits vehicles allowed to reimburse individual health insurance premiums. As such, here are five key advantages of a Section 105 Medical Reimbursement Plan:
Employees choose the insurance plan they want
Reimbursements are tax deductible by business and employees
The Plan is flexible (you can establish amounts for reimbursement and set eligibility requirements)
Reimbursements are not considered taxable income for employees
The Plan is easily administered by your company, and easily used by employees
Learn More About Section 105 Plans
Whether your business is hiring its first W2 employee, you need a formal health benefits package to retain a key employee, or your group health insurance is exceeding internal budgets, Section 105 Plans allow small businesses to offer health benefits without the cost or complication of group health insurance.
What questions do you have about Section 105 plans? Leave a comment below and we'll help answer.