Section 105 Plans Made Easy
Exploring the best health benefit for small employers
Exploring the best health benefit for small employers
A Section 105 Plan is an IRS-regulated health benefit that allows the tax-free reimbursement of medical and insurance expenses, as described under Section 105 of the Internal Revenue Code (IRC).
Section 105 Plans are used by employers in a variety of ways. For example, a common type of Section 105 Plan is a self-funded health benefit, where the employer reimburses employees for qualified health expenses rather than pay premiums to an insurance company.
See a full list of eligible expenses
Section 105 Plans are also known as Health Reimbursement Arrangements (HRAs). PeopleKeep offers administration software and services for three types of HRAs, which nearly every employer can qualify to offer.
Section 105 Medical Reimbursement Plans are quite simple in practice:
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.
There are two main reasons employers use Section 105 Plans:
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.
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.
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:
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 $5,450 for self-only employees and $11,050 for employees with a family in 2022. 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 |
When evaluating Section 105 Plans, there are pros and cons to consider for your organization and employees. This section outlines each below.
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.
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.
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.
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.
The cons of Section 105 Plans are:
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.
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.
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.
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.
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:
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.
(Only applies to plans with 20 or more participants)
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).
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).
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.
Disclaimer: The information provided on this website is general in nature and does not apply to any specific U.S. state except where noted. Health insurance regulations differ in each state.
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