Section 105 plans require specific documents to be in compliance with IRS and Labor Department regulations. Most Section 105 plans are self-funded (or self insured), but some companies choose to enact reimbursement plans such as Health Reimbursement Arrangements (HRA’s) or Healthcare Reimbursement Plans (HRP’s).
The Key Components of a Section 105 Plan Document
These types of plans require strict regulation of plan documents. At minimum, they must include:
- The name of the Section 105 plan administrator, whether a company or individual
- The name of any designated fiduciary who decides claim procedures or benefit appeals, if it is someone other than the plan administrator
- A description of the benefits provided through the plan
- Eligibility criteria for the plan, such as minimum working hours, classes of employees, and any waiting period that is required prior to enrolling in the plan
- A standard of review for benefit decisions
- Any amount the participant must pay towards coverage to be eligible for participation
- The effective date of participation in the plan, typically either the next day or the first day of the following month after eligibility requirements are met
- The plan sponsor’s amendment and termination rights, and a definition of what occurs to plan benefits if the plan is terminated
- Explanation of how benefit provisions are coordinated
- Procedure for designating any administrative duties to a Section 105 TPA
- Definition of how the Section 105 plan is funded
- Specific information regarding COBRA, HIPAA, ACA and any other federal mandates
A business may administer its own Section 105 plan using requisite software, but this is generally not recommended because errors in plan administration can be extremely costly and subject to high penalties.
It is generally cost-effective to choose a qualified plan administrator who can ensure that the business is protected and meets the legal requirements. Specific legal requirements include the below:
- COBRA – plans with 20 or more participants must offer COBRA benefits that allow an employee to continue receiving medical benefits after termination. The employee must pay for the cost of their plan, but this allows plan continuance until another employer is found.
- IRS plan documentation – Section 105 plans must comply with IRS requirements, including defined expense eligibility, employer contribution amounts and proper documentation of expenses that were paid.
- Health Insurance Portability and Accountability Act (HIPAA) – HIPAA requirements require that protected health information should be given to the company processing reimbursement claims and should be held confidentially.
- Employee Retirement Income Security Act (ERISA) – Under ERISA, Section 105 plans are included as employee welfare plans. Summary plan descriptions and information must be provided to each employee. Employers cannot endorse any specific health insurance plan, and must not directly pay for a specific plan.
- Patient Protection and Affordable Care Act (ACA) – The ACA requires that no annual or lifetime limits can be placed on essential health benefits. Employees also cannot wait over 90 days for health care reimbursement, and plans must allow coverage for individuals up to age 26 under their parents’ plans.
Section 105 Plans and Tax Reform (Tax Cuts and Jobs Act)
In general, the Tax Cuts and Jobs Act (TCJA) did not affect Section 105 plans in any way. Small business owners are still able to adopt the plans according to prior rules and enjoy the tax-free benefits if they are eligible. Early versions of the TCJA bill included changes that would have impacted the tax treatment of Section 105 plans, but these were removed from the final version of the Act. Medical and fringe-related benefits that were changed under TCJA include the below:
- Removal of individual mandate beginning January 1, 2019. The 2010 Affordable Care Act (ACA) enacted a mandate requiring individuals to have health insurance coverage, either through an employer or purchased individually through the free marketplace. Non-compliance with the mandate subjected the individual to a penalty equal to $695 or 2.5% of household income in excess of tax filing thresholds, whichever was higher. The TCJA removed the individual penalty for not having medical insurance.
- Medical expense deduction reduced to 7.5% of AGI in 2017 and 2018. Under ACA, unreimbursed medical expenses could only be claimed as a deduction if they exceeded 10% of AGI. This temporary change is only available in 2017 and 2018 and will revert to 10% of AGI in 2019.
- Enaction of a business credit for employers who provide not less than two weeks of annual paid family and medical leave. Under the Family and Medical Leave Act (FMLA), businesses must provide employees up to 12 weeks of unpaid, job-protected leave to care for a new child or family member who has a serious health condition. Employees are also eligible to take the unpaid leave to care for themselves if they are unable to perform a job due to a health condition. The change to this policy enacted by TCJA enables employers whose employees must take leave under FMLA to be eligible for a general business deduction of the wage amounts paid to the employee during the leave period. To be eligible for the credit, the business must pay at least 50% of the employees’ normal salary for a minimum of two weeks. The credit starts at 12.5% of wages paid during the leave period and increases 0.25% each percentage point by which the rate of payment exceeds 50%. This is in addition to the amount already eligible to be deducted from taxable income for wages paid to employees.
- The inflation rate used to index maximum contributions has changed. In prior years, maximum contribution rates were determined by the Consumer Price Index for all Urban Consumers (CPI-U). Starting January 1, 2018, this index is now tied to the Chained CPI-U. This is expected to result in slower growth rates of maximum contributions to HSA and FSA plans.
- Deduction for meals, food or beverages has been eliminated when incurred as entertainment, amusement or recreation. In prior years all meals, food and beverages were eligible for a deduction of up to 50% of the cost, whether for entertainment or other reason. This is no longer available to business owners as of January 1, 2018.