How Does a Section 105 Medical Reimbursement Plan Work?

Section 105 Medical Reimbursement Plans are quite simple in practice:

  • The employer must establish a formally written Section 105 plan (See our article on requirements for plan documents)
  • The employer determines a monthly or annual allowance they want to make available to each employee during a period of coverage (generally a year), and other terms of the plan.

As employees submit eligible expenses, the employer reviews the expenses to verify they are eligible (this step is often outsourced). The employer then reimburses the employees (100% tax-free) up to the allowance cap set in the previous step.

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The benefits of Section 105 Plans

There are two main reasons employers use Section 105 Plans:

1. It’s a self-funded health plan

A common reason employers use a Section 105 Plan is it is a self-funded health plan, where the employer reimburses employees for health benefits rather than pay premiums to an insurance company.

Employers choose to self-fund their health benefits because it allows them to save the profit margin that an insurance company adds to its premium for a fully-insured plan.

2. It’s a tax-free health benefit

With a Section 105 Plan, employers don’t have to pay taxes on the expenses they reimburse employees for. Many employers who do not qualify for group health plans or simply can’t afford them often resort to offering taxable wage increases. In these cases, employers can save a lot of money by reimbursing employees through this type of plan, because payroll and income taxes aren’t applied. A Section 105 Plan helps alleviate those expenses.

On top of it all, a Section 105 Plan doesn’t have to be a standalone benefit. Employers who are already offering a group health plan can offer a Section 105 alongside the group plan, and there are a few ways to do that, depending on your needs. The best way to figure out which type of Section 105 Plan to offer is by taking our quiz below.

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Comparing the PeopleKeep health reimbursement arrangements

Currently, you have the option to choose between multiple Section 105 Plans, including: a Qualified Small Employer HRA (QSEHRA), an Individual Coverage HRA (ICHRA), and a Group Coverage HRA (GCHRA). Choosing the one that is right for you can feel complicated, so we’ve broken it all down with our HRA comparison chart.

Compare our three HRAs using the chart below:

HRA Comparison Chart

Feature

QSEHRA

ICHRA

Group Coverage HRA

Business size restrictions

Limited to businesses with fewer than 50 FTE employees

None

None

Allowance amount restrictions

Limited to $5,250 for self-only employees and $10,600 for employees with a family in 2020. Businesses cannot give different employees different allowance amounts based on criteria other than family status.

None

No minimum or maximum contribution requirements. Businesses can give different employees different allowance amounts based on job-based criteria.

Group health policy requirements

Can’t be offered with a group health policy

Can be offered with a group health policy, but employees cannot have a choice between the group policy and the HRA.

Must be offered with a group health policy

Individual health policies permitted

Yes

Yes; in fact, they're required for participation in the HRA.

No

Premium tax credit coordination requirements

Employees must reduce their premium tax credit by the amount of their HRA allowance.

Employees cannot collect premium tax credits and participate in the ICHRA. However, if the ICHRA allowance is considered unaffordable, employees may waive the HRA and collect the credits.

N/A. These HRAs can’t reimburse employees for individual premiums.

Annual rollover permitted

Yes

Yes

Yes

Medical expenses available for reimbursement

Any or all items listed in IRS Publication 502

Any or all items listed in IRS Publication 502

Any or all items listed in IRS Publication 502 with the exception of individual insurance premiums

Employee eligibility guidelines

All full-time employees are eligible. Businesses can decide on part-time employee eligibility.

Businesses can decide on eligibility based on 11 different employee classes.

None

Pros and Cons of Section 105 Plans

When evaluating Section 105 Plans, there are pros and cons to consider for your organization and employees. This section outlines each below.

Pros of a Section 105 Plan

  1. Flexibility

    Section 105 Plans are extremely flexible for employers - you can design the Plan in a variety of ways to meet your budget, health benefit, and hiring needs. For example, employers decide the amount to contribute to employees' health reimbursement allowances and can even offer different amounts to different classes of employees.

  2. Cost Controls

    With Section 105 Plans, the employer owns the funds and the plan. Section 105 reimbursements are only issued to employees once they show proof of a valid medical expense. Additionally, when the employee terminates employment, any unused funds stay with the employer. With group health plans, the expenses can change every year, and rate hikes are not uncommon. But with a Section 105 Plan, employers set spending limits that cannot be exceeded.

  3. Cost Savings

    Using a Section 105 Plan reduces the amount of federal insurance contribution act tax (FICA) and federal unemployment tax (FUTA) tax an employer pays. Employers can deduct reimbursements as a business expense and exclude them from wages subject to FUTA and the employer portion of FICA. Additionally, employees save 20-40% on medical expenses by using pre-tax dollars rather than after-tax dollars. And, reimbursements are generally excluded from employees' gross income.

  4. Recruiting Retention

    Many businesses struggle to find affordable health insurance. Because of the cost savings and predictability, Section 105 Plans help employers offer more robust health benefits. This is a big bonus for recruiting and retaining key employees.

Cons of a Section 105 Plan

The cons of Section 105 Plans are:

  1. A new benefit administration model

    Offering a Section 105 Plan is a different approach for many employers and employees. As such, some employers perceive the hassle and risk of fines as a con of offering a Section 105 Plan. With the wrong administrator, this can be true. What's the workaround? Use an online Section 105 administration services to alleviate this. With the right Section 105 software, administrating the benefit generally takes about 5-10 minutes each month.

  2. Limited tax benefits for some owners

    Some types of business owners receive limited tax benefits from reimbursements through the business, but many business owners can't participate directly in a Section 105 Plan. Read more on owner participation.

  3. Additional compliance regulations

    Section 105 Plans are group health plans and are subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules. As such, some employers perceive compliance as a con. To make sure your arrangement is compliant, and to make compliance easy, use a Section 105 software administrator.

Additional terms to Section 105 Plans

There are many different types of arrangements that fall within the umbrella of Section 105 Plans. Some common terms you might hear are:

These all are different terms that generally mean the same thing and refer to health reimbursement arrangements (HRAs) as a whole.

Design Requirements for Section 105 Plans

All employers must qualify to offer a traditional group health plan, but what are the rules for Section 105 Plans? Luckily, nearly every employer qualifies to offer one, but unique rules apply to your organization, depending on how it’s structured and what you want to offer to employees.

Here are some rules regarding Section 105 Plans:

  • A Section 105 Plan is paid for solely by the employer and cannot be funded through employee salary deduction.
  • A Section 105 Plan may only reimburse employees during their effective dates in the plan.
  • A Section 105 Plan can reimburse for eligible medical expenses and health insurance premium amounts (see our eligible expense tool for eligible expenses).
  • Each eligible healthcare expense must be substantiated. PeopleKeep’s software helps employers like you perform this function, saving you time and money.
  • Reimbursements are generally excludable from the employee's gross income under Internal Revenue Code Sections 106 and 105.
  • Section 105 Plans are considered group health plans, and as such, must be designed and administered to comply with the IRS, HIPAA, ERISA, COBRA, and the ACA.
  • Section 105 Plan Documents are required. PeopleKeep also offers these documents as part of your subscription. We automatically generate them, and they become available at the same time you finish designing your benefit with us.

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Compliance Requirements for Section 105 Plans

Section 105 Plans are considered group health plans. As such, they must comply with IRS, HIPAA, COBRA, ERISA, and the Affordable Care Act (ACA) rules.

This section details compliance requirements that may impact your Section 105 Plan.

Tip: Use a Section 105 administration software to make compliance easy.

Internal Revenue Service (IRS)

  • Plan documents: The IRS requires that written plan documents are established and maintained. Plan documents define what expenses are eligible for reimbursement, the amount of employer contribution, and other required details about the reimbursement plan.
  • Expense documentation: The IRS requires that employees submit proper documentation verifying their claim for reimbursement and that supporting documentation is saved on file for ten years. This often takes the form of receipts and doctor’s notes.
  • Non-discrimination: Section 105 Plans must comply with IRS nondiscrimination rules. The rules state the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.

Health Insurance Portability and Accountability Act (HIPAA)

  • HIPAA privacy rules: Section 105 Plans are governed by HIPAA Privacy Rules. To administer a plan correctly, the entity processing employee reimbursement claims receives Protected Health Information (PHI) that is required to be held confidentially under HIPAA.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

(Only applies to plans with 20 or more participants)

  • COBRA compliance: Employers must give terminated employees the option to continue their participation in the Section 105 Plan for a period after termination, and may charge an employee up to 102% of the value of their allowance if COBRA is elected.

Employee Retirement Income Security Act (ERISA)

  • Summary Plan Description: Section 105 Plans are employee welfare plans under ERISA. It requires every [welfare] plan to have a Summary Plan Description (SPD) and to furnish copies to each participant.
  • ERISA compliance: The U.S. federal government has specific regulations employers must comply with in order to reimburse employees for individual health insurance premiums without triggering ERISA plan status for the individual health insurance policies. For example, the employer must not endorse specific individual health insurance policies or pay directly for them.

Patient Protection and Affordable Care Act (ACA)

  • Annual limit compliance: Section 2711 of the Public Health Services (“PHS”) Act, as added by the ACA, provides that no annual or lifetime limits may be placed on essential health benefits (“EHB”). PHS Act 2711 provides that annual limits and lifetime limits may be placed on benefits that are not EHB, such as health insurance premiums. Section 105 Plans must be designed to comply with PHS 2711.
  • Preventive care compliance: Section 2713 of the PHS Act, as added by the ACA, requires group health plans (including Section 105 Plans) to cover basic preventive health services without cost-sharing.
  • Internal and external claims appeal process: The ACA added new requirements to the internal and external appeal process including how and when procedures are communicated to plan participants.
  • Dependent coverage for adult children up to age 26: Section 2714 of the PHS Act, as added by the ACA, provides that group health plans (including Section 105 Plans) that make available dependent coverage of children must make such coverage available for children until 26 years of age.
  • Uniform explanation of coverage and definitions: The ACA requires that group health plans, participants, and beneficiaries receive a standardized summary of benefits and coverage (“SBC”) and a set of uniform definitions (“Uniform Glossary”), both of which must conform to requirements outlined in the ACA and existing regulations.
  • Form 720 comparative effectiveness research (CER) fee: The ACA includes a "research fee" that plan sponsors must pay on an annual basis annually via Form 720.

60-day notice of material modification: The ACA requires employers to provide 60 days advanced notice to participants when making material modifications to their group health plan (including Section 105 Plans).

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Frequently Asked Questions

What is a Section 105 Plan?

A Section 105 Plan allows the tax-free reimbursement of employees’ medical and insurance expenses, as allowed under Section 105 of the Internal Revenue Code (IRC).


Is a Section 105 Reimbursement Plan considered health insurance?

No. A Section 105 Plan is not health insurance. Rather, it is a vehicle used to reimburse medical and health insurance expenses tax-free, as allowed by Section 105 of the IRS code. For applicable large employers, a Section 105 Plan qualifies as minimum essential coverage. 


Can business owners participate in a Section 105 Plan?
Almost all business owners can participate in a Section 105 Plan, except for S Corporation owners with more than 2% ownership in the organization. See our article on owner eligibility.

What is the difference between a Section 105 Plan and an HSA?
The biggest difference between Section 105 Plans and health savings accounts (HSAs) is that the business owns the reimbursement arrangement (Section 105 Plan) while the employee owns the HSA. In addition, with a Section 105 Plan employers only make reimbursements after expenses have occurred, whereas an HSA is a pre-funded account that is owned by the employee. To learn more, see our article on HRAs vs. HSAs.

Can I have a section 105 Plan and an HSA at the same time?
Yes! Unique rules apply to users, especially regarding what items are available for reimbursement when an HSA is in place. To learn more, read our article on using HRAs and HSAs.

What can a Section 105 Plan reimburse?
Section 105 Plans can be used to reimburse many health care products and services, including the following types of insurance premiums, provided they were not already paid with pre-tax dollars: Major medical individual health insurance premiums; Dental care and vision care premiums; Qualified ancillary premiums (e.g., accident policies); Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums; Medicare Advantage and Supplement premiums; and COBRA premiums. To learn more, read our article on reimbursing premiums with an HRA.