A Section 105 plan, also known as a Medical Reimbursement Plan, is a tax-advantaged arrangement under the Internal Revenue Code that allows employers to reimburse employees for medical expenses. These reimbursements are generally tax-free to the employee and deductible to the employer. Section 105 plans are commonly used by small business owners—particularly sole proprietors, partnerships, and S corporations—to convert personal medical expenses into legitimate business deductions when properly structured.

One of the most effective uses of a Section 105 plan is when a business owner employs their spouse. By hiring the spouse and providing a Section 105 plan as an employee benefit, the business can reimburse the spouse (and their family, including the business owner) for medical expenses on a tax-free basis. This setup can cover health insurance premiums, out-of-pocket medical costs, dental and vision care, and more—provided the plan meets IRS requirements and is properly documented.

Section 105 plans can stand alone or be integrated into broader benefits strategies such as Health Reimbursement Arrangements (HRAs) or Qualified Small Employer HRAs (QSEHRAs). Compliance with nondiscrimination rules, proper documentation, and plan administration are crucial to ensure the tax benefits are preserved. When used correctly, Section 105 plans are a highly efficient tool for reducing taxable income and funding healthcare costs with pre-tax dollars.

Key Features of a Section 105 Plan:

Allows tax-free reimbursement of medical expenses to employees.
Provides a 100% tax deduction for the business.
Commonly used by small business owners who employ their spouse.
Covers premiums, copays, dental, vision, and other qualified expenses.
Requires a formal written plan document.
Must comply with IRS rules and nondiscrimination requirements.
Can be part of a broader Health Reimbursement Arrangement (HRA).
Reduces self-employment tax when structured properly.