What Is Section 105 Plan - Explained
Updated · May 24, 2022
If you’re a small business owner, you can offer your employees a number of benefits with a Section 105 plan.
It allows you to reimburse workers for a wide range of medical expenses. And the potential for tax deductions is huge.
Plus, unlike an HSA, it allows you and your spouse to enroll too.
There are a number of documents you need to complete and rules to follow to provide that plan to employees. But the benefits make it well worth the effort.
Find out everything you need to know about these medical reimbursement plans below.
What Is a Section 105 Plan?
Section 105 of the Internal Revenue Code lets employers create a plan to help employees cover their medical expenses.
There are several types of plans that fall into that category.
These include Medical Expense Reimbursement Plans, Health Reimbursement Arrangements, Accident and Health Plans, and more.
Below, we present the basic rules for these plans and how they work.
How Does a 2022 Section 105 Medical Reimbursement Plan Work
Most Section 105 plans run on a calendar year—from January to December.
The employer chooses the contribution amount and the maximum carry-over sum.
If an employee doesn’t use all funds, they can carry over the determined amount to the following year.
It will have access to the funds until the business ceases operations, the plan ends, or the worker becomes ineligible.
In some cases, upon the death of an employee, all or a part of the unused funds may go to the named beneficiaries. If there aren’t any, the sum will go to the employee’s state.
These expenses are excludable from gross income under Section 106 of the Internal Revenue Service Code.
For the most part, the employer determines the conditions of the plan.
There are some limitations based on the business’ filing status.
Qualified Filing Statuses
Various filing statuses can use an IRS Section 105 plan.
Here are the rules for each one.
Sole proprietors can use Section 105 to cover their spouses if they’re legitimately employed in the business.
The spouse will be treated as a regular worker.
The business owner will provide medical benefits as part of the compensation package.
A Section 105 plan allows partnerships to offer medical benefits to employees.
The owners’ spouses are also eligible, as long as they are legitimate employees of the company.
However, if the business partners are also spouses, they cannot have a Section 105 plan.
Employees of a c Corporation can deduct medical expenses.
That includes the owner-employee.
In addition, there is no need for the owner’s spouse to be employed in the corporation.
They can be covered via the owner’s Section 105 medical reimbursement plan.
If you're a shareholder in an S corporation, you have to pay income tax on the medical reimbursement plan benefits. The same goes for your dependents.
Limited Liability Company (LLC)
An LLC’s Section 105 plan requirements depend on the company’s filing status.
Based on that, the rules for sole proprietorship, corporation, or partnership will apply.
IRS HRA Eligible Expenses for 2022
A Section 105 plan is an IRS-approved way for small businesses to reimburse their employees for medical expenses.
The plan allows employees to use pretax dollars to pay for qualified medical expenses, such as:
- Health insurance premiums
- Doctor's visits
- Prescription drugs
- Physician bills
- Laboratory fees
- Hospital bills
- and more
Since the money is tax-deductible, it can result in significant tax savings.
Section 105 Plan Document Requirements
The plan must comply with the IRS nondiscrimination and other requirements, COBRA, HIPAA, and PCORI.
In addition, employees need to fill in the following documents:
- W-2 Form (every year)
- W-3 Form (every year)
- I-9 Form (one time)
- 941/943 Forms
- Form 940 for non-related employees
Benefits over HSA
You have to be careful when you’re choosing a provider, though. You don’t want to encounter a scammer like the Louisiana fraudsters who stole over $25 million using a fake “Classic 105 plan.”
Still, such incidents are rare.
More importantly, Section 105 gives a lot of freedom to the employer.
Besides, it includes a much wider range of medical expenses than an HSA. Plus, business owners can customize them to their preferences.
They also determine the contribution limit and carry-over amount.
Finally, Section 105 plans have far less stringent eligibility requirements than HSAs.
For one thing, both small business owners and employees can take advantage of the benefits.
HSAs are available only to sole proprietors and individuals.
A Section 105 plan is a great way for small businesses to offer medical benefits to their employees.
Better yet, owners and their dependents can take advantage of the benefits too.
And since the funds are tax-deductible, it can result in significant tax savings for all parties.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.