Section 105 Plans

A Section 105 plan allows businesses to reimburse an employee for medical and insurance expenses incurred by the employee or his or her dependents. The most common type ofImage may be NSFW.
Clik here to view. Section 105 plan is a self-funded (or self-insured) health plan, where the employer has chosen to self-fund (or self-insure) health benefits rather than pay premiums to an insurance company. Section 105 plans are also frequently found in the form of Health Reimbursement Arrangements (HRAs).  A businesses might also implement a Section 105 plan alongside a conventional employer-sponsored health insurance plan (to reimburse amounts not covered by insurance) or as a stand-alone medical reimbursement plan (to reimburse amounts for out-of-pocket health insurance premiums). 

What are Advantages of Section 105 plans?

Section 105 plans offer several advantages to both the employer and the employees. All reimbursements are 100% tax deductible by the businesses and its employees.  When designing a Section 105 plan, the business has enormous flexibility, such as establishing maximums amounts for reimbursement and setting eligibility requirements for participation. The biggest advantage to employees is that a Section 105 plan reimbursement is not considered taxable income.

Can a Business Self-Administer a Section 105 Plan?

The short answer is yes, but most experts do not recommend self-administering a Section 105 plan with out proper IRS/HIPAA/ERISA admin software.  Many employers that self-administer a Section 105 plan often overlook important compliance obligations that put them at financial risk. Failure to comply with the following requirements is common and can be costly:

1. COBRA - A Section 105 plan is subject to COBRA rules.
2. HIPAA Privacy - A Section 105 plan is governed by HIPAA Privacy rules.
3. Medicare Reporting - A Section 105 plan is subject to Medicare Secondary Payer (MSP) provisions.
4. Legal Plan Documents - ERISA requires that Section 105 plans be established and maintained pursuant to a written instrument.

What are the Section 105 Nondiscrimination Rules?

The Section 105 nondiscrimination rules require that 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.

How Does a Section 105 Plan Work?

Section 105 plans are actually quite simple in practice:

1. The business must establish a formal written Section 105 plan (See plan document requirements).
2. The business determines the amounts available to each employee for reimbursements during a period of coverage (generally a year). 
3. As eligible expenses are submitted, the business reimburses the employees (100% tax-free) up to the available amounts. 
4. Unused funds at the end of the year are typically carried over to the next year. 

Image may be NSFW.
Clik here to view.

Image may be NSFW.
Clik here to view.