Section 105 plans have been used for decades to help business owners get tax deductions for medical expenses. They are similar to Health Savings Accounts, but there are a few significant differences. In this post, we answer the basic question – what is a section 105 plan?
Section 105 of the Internal Revenue Code was established to provide clear guidelines to small business owners and sole proprietors who purchase health insurance for themselves and their employees. The Code allows business owners and their employees to pay for medical expenses and reimbursements using pre-tax dollars if a qualified Section 105 plan is adopted.
What is a Section 105 Plan? The Answer
Current qualified Section 105 plans include self-insured plans, group-integrated HRA (Health Reimbursement Arrangement), and stand-alone reimbursement medical plans, such as the QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) or a one-person HRA. Each of these plans have their own rules and policies and have different impacts on the business.
Self-insured plans are just that – there is no reliance on an outside insurance agency for partial coverage of medical insurance, and there are no premiums to pay. Instead, the business may pay an administrator to process medical claims and provide a network of doctors and medical professionals to their employees.
However, the business takes on the responsibility of paying for all of the claims, which can be financially risky if more claims arise than were expected. It is possible to implement a stop-loss policy to insure against unpredictable expensive claims, which would limit the amount of unexpected losses in the case of excess claims.
Group-integrated HRA’s allow a company to participate in a regular group health insurance plan while qualifying for Section 105 tax benefits. Typically, a business would typically adopt a high deductible plan to reduce the cost of health insurance premiums but would provide a set allowance to their employees for use to meet deductibles and co-payments.
Employees are also allowed to contribute a set percentage of tax-free dollars from their paycheck towards the HRA fund, which can also be used towards the deductible and co-payments for their plan.
The QSEHRA Option
The QSEHRA option is available to small businesses with fewer than fifty employees who do not offer a traditional group medical, dental or vision plan. The company offers a set amount of money to each employee per year that allows them to purchase their own insurance, pay for premiums, prescriptions or doctor visits.
For 2019, the benefit maximum that can be offered to each employee on a tax-free basis is $5,150 for a single employee or $10,450 for employees with a family. Employees must initially pay for their expenses out of pocket but can submit a claim for reimbursement to their company who will reimburse the employee free of payroll tax.
Stand-alone one-person HRA’s offer 100% medical reimbursement to a single employee for medical premiums and expenses such as co-pays and prescriptions. They are tax-free to the employee and tax-deductible to the business.
There are no contribution limits for a one-person HRA like there are for QSEHRA’s. Typically, the employer will consult with an administrator to ensure that the plan is tax-compliant and meets the definition for a Section 105 plan.
Stand-alone HRA’s are available to self-employed individuals who work as sole proprietors, corporations, limited liability companies, and partnerships. Each of these business structures have specific rules regarding the establishment of a stand-alone HRA, so it is important to contact a professional to ensure that it is handled properly.
If your knowledge and understanding of section 105 plans is rather limited, then our brief guide on the topic will definitely come in handy. For one thing, a section 105 plan enables tax-free reimbursement of insurance and medical expenses.
This type of plan can be used in more than one way. One of the most widespread section 105 plans is a self-funded health plan. This entails that the employer self-insures or, alternatively, self-funds health benefits, as opposed to paying premiums to insurance companies.
At the same time, section 105 plans might also be found in the form of Medical Reimbursement Plans as well as Health Reimbursement Arrangements. With that being said, let’s have a look at the main benefits associated with this type of plans.
What is a Section 105 Plan? The Benefits
- Cost Control
First of all, when it comes to section 105 plans, in the position of the employer, you own the plan. Thus, we could say that the plan is fully funded by you – as the employer. In regard to section 105 reimbursements, these are facilitated to employees after they present a proof of a valid medical expense. In the case in which the employment is terminated by the employee, then the unused funds remain with the employer.
Another key benefit associated with section 105 plans is, of course, their unmatched flexibility. More specifically, this plan enables you to fully customize it depending on your preferences and individual specifications regarding budget, hiring needs, health benefits, so on and so forth. For instance, you may choose to provide individual benefits to specific classes of employees. Granted that the plan remains in compliance with the legal specifications, you enjoy a certain degree of flexibility.
- Recruiting Retention
It is quite common for businesses and entrepreneurs to struggle when it comes to finding an insurance plan that is equally convenient and budget-friendly. Nonetheless, the section 105 plan comes as a great alternative, due to its high level of predictability and the fact that you can save a lot of money. At the same time, by providing your employees with excellent insurance, you can retain your best staff over the course of time.
- Cost Saving
Moving on, it’s also worth pointing out that if you opt for a section 105 plan, you may also decrease the amount of FUTA and FICA tax you are required to pay as an employer. What is more, employers also have the option of deducting reimbursements. Concurrently, they can eliminate them from wages that are subject to FUTA and FICA.
Employees can also benefit from this, in the sense that they can manage to save up to 40 percent when it comes to medical expenses. That’s because they utilize pre-tax dollars instead of after-tax dollars.
So what is a section 105 plan? We hope that we have answered that question and addressed some of the primary benefits associated with section 105 plans. Are you thinking of giving this option a try? If you have any other questions on the topic, we would be more than glad to address them.