1. What is a Section 105 Plan?
A Section 105 Plan is an IRS-approved health reimbursement arrangement that allows employers to reimburse employees for qualified medical expenses. These reimbursements are tax-free to the employee and tax-deductible for the business.
2. Who can use a Section 105 Plan?
Section 105 Plans can be used by most business types, including C-corporations, S-corporations, sole proprietors, and partnerships. However, eligibility and benefits vary based on business structure and whether the business has employees.
3. Can a sole proprietor participate in a Section 105 Plan?
Sole proprietors cannot directly benefit from a Section 105 Plan. However, they can hire their spouse as a legitimate employee and use the plan to reimburse medical expenses for the spouse and family, including the sole proprietor.
4. What expenses are eligible for reimbursement?
Eligible expenses include health insurance premiums, co-pays, deductibles, dental and vision costs, prescription drugs, and other medical services allowed under IRS Section 213(d). Cosmetic procedures and general wellness expenses typically do not qualify.
5. Is a written plan document required?
Yes. The IRS requires a formal written plan document outlining the rules of the Section 105 Plan. Without this document, reimbursements may not be considered valid or tax-deductible.
6. Are Section 105 Plans subject to nondiscrimination rules?
Yes, in most cases. Section 105 Plans must not favor highly compensated employees. However, one-person plans (e.g., C-corporation owners with no other employees) are generally exempt from nondiscrimination testing.
7. Can the plan reimburse health insurance premiums?
Yes. Health insurance premiums for medical, dental, vision, Medicare, and long-term care can be reimbursed under a Section 105 Plan, as long as the plan document allows for it.
8. What documentation is required to reimburse expenses?
Employees must provide proof of expenses, such as receipts, insurance statements, or Explanation of Benefits (EOBs). Employers must keep records to comply with IRS requirements.
9. Can I use a Section 105 Plan if I already have a group health plan?
Yes. A Section 105 Plan can work alongside a group health plan or as a stand-alone reimbursement plan, depending on your business setup and number of employees.
10. What are the tax benefits of a Section 105 Plan?
Reimbursements are 100% deductible to the business and received tax-free by the employee. This reduces payroll taxes and overall taxable income, providing significant savings.