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FAQ - Who Can Participate in a Section 105 Plan?

Written by: Christina Merhar
August 21, 2015 at 12:00 PM

Who Can Participate in a Section 105 Plan?Small businesses strive to offer health benefits to recruit and retain the best employees. But, there is a problem. Traditional employer-provided health insurance is too expensive. As a result, only 54 percent of small and medium businesses offer health insurance today.

To get the cost of health benefits under control, many small businesses offer a Section 105 Plan to reimburse employees tax-free for individual health insurance reimbursement.

As small businesses evaluate this approach, a common question is: Who can participate in a Section 105 Plan?

Participation Rules for a Section 105 Plan

Employee and dependent participation is based on three factors:

  • Does the employee meet the criteria for the employee class?

  • Has the employee satisfied the waiting period?

  • If the employee is also an owner, does their business filing status allow then to receive reimbursements tax-free?

Employee Classes

With a Section 105 Plan, the employer sets eligibility criteria by defining one or more employee classes. Employee classes can be based on bona fide job criteria such as job role, location, or hours worked weekly. In addition to setting eligibility criteria, employers may use employee classes to offer different level of benefits to different classes of employees.

For example, an employer could use employee classes to offer $500/month to full-time employees and $200/month to part-time employees.

Read more: Using Employee Classes with Premium Reimbursement to Recruit and Retain Key Employees

Waiting Period

In addition to employee class eligibility, employers may set a waiting period (up to 90 days).

The waiting period is the time that must pass before otherwise eligible employees may participate in the health plan. Under new health reforms, the maximum waiting period is 90 days. The waiting period can vary by employee class.

For example, an employer could set a waiting period of 30 days for full-time employees and 60 days for part-time employees.

Owner Status

Lastly, we often receive questions about business owner participation in a Section 105 Plan.

Business owners can participate, although eligibility for tax advantages depends on business structure. C-corporation owners may fully participate in the Section 105 Plan and receive reimbursements tax-free. S-Corporation owners (> 2% shares), Sole Proprietors, and Partners may participate in the plan but have limited eligibility for tax advantages.

Read more: Section 105 Plan Eligibility - By Owner Status


Who can participate in a Section 105 Plan? It’s simple. The employer defines eligibility with employee classes and waiting periods. Employees who meet these criteria are eligible to participate. Additionally, owners are eligible to participate in a Section 105 Plan, but tax advantages vary by business filing status.

What questions do you have about participation in a Section 105 medical reimbursement plan? Let us know in the comments below.

The Comprehensive Guide to the Small Business HRA

Topics: Section 105, FAQs

Additional Resources

Trying to decide which HRA is best for you? Take our quiz to find out.
Get our guide on how to offer health benefits with a small budget.