As a small business, it is crucial to follow the IRS and Department of Labor regulations to ensure that a Section 105 plan is set up properly and qualifies for Section 105 tax treatment. As such, it is recommended that businesses work with a qualified plan administrator and certified public accountant (CPA) so that the most appropriate plan for the business is chosen.
Considerations in choosing a Section 105 plan include the legal structure of the business (C-Corporation, S-Corporation, sole proprietorship, partnership, or other), the cost of the plan, type of coverage needed, and how many employees are eligible to be covered.
How to Set up a Section 105 Plan
Basic steps to set up the plan include the below:
- First, it is extremely important to consult with both a plan administrator and CPA who are familiar with section 105 plans. They will advise the type of section 105 plan (self-insured, QSEHRA, stand-alone reimbursement plans, or group-integrated HRA plan) to choose that best fits with the business’ legal structure.
- Next, the business owner should choose a start date for the plan. It is important to note that if the business already has some other type of coverage, they must end that coverage with a date prior to the start date of the new coverage. The business owner or plan administrator should ensure that the cancellation of the old plan is in motion prior to moving to a new section 105 plan.
- The business should define employees who are eligible to participate in the plan. Under current regulations, the plan must be offered to any employees who receive a W-2 but are not required to offer the plan to individuals who are part-time employees (defined as working less than 30 hours per week).
- Define the amount the business can afford to pay towards premiums or out of pocket expenses. It is important to offer a plan to employees that will meet their personal goals and improve employee morale, but the business must also choose an option that they can afford.
- Work with an outside plan administrator to create a set of plan documents that comply with the IRS and Department of Labor. These plan documents should establish monthly allowances or premiums to be paid and define employees who are eligible for coverage. Keep in mind that these are legal documents and failing to set them up properly can lead to significant penalties or a forced lapse in coverage in the future.
- Inform employees of the new benefits that are available to them. If you purchase group health insurance for the company, plan administrators will often agree to meet with your employees to explain the new benefits and what is covered under the plan. This is a great tool to have and can prevent misunderstandings of coverage in the future. It also ensures that employees are aware of their coverage options and can make decisions that are best for them and their families.
In summary, enacting a Section 105 plan is not an easy task and should not be attempted alone by the average business owner who does not have expertise in the tax and employment laws associated with these plans. Therefore, it is highly recommended to communicate with qualified plan administrators and CPA’s who can make the process much smoother and eliminate common errors.