Section 105 HRA Plan Document: Draft in a Few Easy Steps!

Drafting a Plan Might not be as Easy as You Thought

A Section 105 HRA is a popular health reimbursement arrangement. But how much do you know about a Section 105 HRA plan document?

The IRS has strict rules that must be followed when documenting these plans. If mistakes are made, the plan may be disqualified.

In this post, we’ll show you the sections of a Section 105 HRA plan document and discuss the language that must be included. Let’s Jump in!

What Is a Section 105 HRA?

A Section 105 HRA is an employer-sponsored plan that reimburses employees for medical expenses on a tax-free basis. Employers choose which expenses are reimbursable and how the plan is administered. These plans are flexible and cost-effective for small businesses with few or no employees. They are especially valuable for sole proprietors and family-owned companies.

Unlike HSAs or FSAs, only the employer contributes to an HRA. There is no employee funding or salary reduction involved in the plan. The employer decides how much to contribute annually. The employee receives tax-free reimbursements for qualifying medical expenses.

Common types of expenses include insurance premiums, copayments, dental and vision care, and prescriptions. Employers may follow IRS Publication 502 for eligible expenses. This provides guidance on what the IRS considers deductible medical costs. The plan must define these items clearly in the written document.

There are different versions of Section 105 plans. These include one-person HRAs, integrated HRAs with group plans, and stand-alone HRAs for small employers. Each version has specific rules for participation and reimbursement. The plan document must reflect those details.

Why a Plan Document Is Essential

The IRS requires a written plan document for any Section 105 HRA. Without it, reimbursements may be treated as taxable income to the employee.
This also prevents the employer from deducting the payments. A compliant document is critical for tax benefits.

The plan document outlines how the HRA is structured and administered. It must include who qualifies, what expenses are covered, and how reimbursements are processed. It also explains when benefits begin and end. These rules must be applied consistently for all eligible employees.

An incomplete or missing plan document can result in audit issues and IRS penalties. If reviewed by the IRS, the employer must present the plan on request. Verbal agreements or informal arrangements are not sufficient. A formal written Section 105 HRA plan document is mandatory for compliance.

The document should be reviewed and updated regularly. Business changes, tax law revisions, or plan design updates may require modifications.
Employers should ensure the plan always reflects current practices and regulations. Professional guidance is often helpful during this process.

Feature	Details
Plan Type	Employer-funded medical reimbursement plan
IRS Code Section	Section 105
Eligible Entities	C Corps, Sole Props (spouse plan), Partnerships, S Corps (with restrictions)
Tax Benefit to Employer	100% deductible
Tax Benefit to Employee	Tax-free reimbursement
Eligible Expenses	Medical, dental, vision, premiums, etc.
Plan Document Required	Yes
Substantiation Required	Yes (receipts, EOBs, etc.)

What the Plan Document Should Include

The plan document must define employee eligibility rules in detail. This includes which employees are covered, waiting periods, and employment status requirements. Some plans may cover only full-time employees. Others may include spouses or dependents of eligible workers.

It must also list all reimbursable expenses. Most plans reference IRS Publication 502 for guidance. Covered expenses should be clearly identified in writing.
Ambiguity may lead to compliance problems later.

The document must outline how employees submit claims. It should specify required documentation such as receipts or invoices. Timelines for claim submissions and reimbursements must also be defined. This helps ensure smooth administration and employee understanding.

Annual reimbursement limits should be clearly stated in the Section 105 HRA plan document. Employers can cap the benefit amount per employee each year. This controls costs while still offering meaningful benefits. It’s a best practice for budget-conscious businesses.

Additional legal language may be needed for HIPAA or ERISA compliance. This is especially important for plans with multiple participants. These disclosures help protect employee privacy and clarify legal rights. Including them supports full regulatory compliance.

Section 105 HRAs for Sole Proprietors

Sole proprietors cannot reimburse themselves under a Section 105 HRA. However, they can hire a spouse as an employee of the business. The plan can then reimburse the spouse’s medical expenses, including family coverage. This creates an indirect but compliant deduction.

The spouse must perform actual work for the business. Job duties should be defined and consistent with compensation. The employment relationship must be legitimate and well-documented. This includes payroll, job descriptions, and time records.

Once hired, the spouse becomes the covered employee under the HRA. The family’s medical expenses are eligible for reimbursement. These include insurance premiums, out-of-pocket expenses, and prescriptions. The business deducts these as legitimate expenses.

This strategy converts personal healthcare costs into deductible business expenses. It’s a legal and effective tax-saving method for sole proprietors.
Proper setup is critical to avoid IRS scrutiny. A complete plan document is a must.

Professional assistance is strongly recommended for this approach. Mistakes can jeopardize deductions and trigger audits. A third-party administrator can help ensure compliance. This protects both the business and the taxpayer.

Section 105 Plan Document Compliance

Section 105 HRAs require continuous compliance and proper recordkeeping. Employers must keep receipts, claim forms, and payment records.
These should match the terms in the plan document. Documentation is key during an audit.

The plan should be reviewed annually. Changes in the business, employee count, or tax law may require updates. Employers should revise the plan as needed. Keeping it current avoids compliance issues.

Consistent communication with employees is also important. They should understand how the plan works and what’s required. A summary of benefits can help with this. Clarity supports better usage and fewer questions.

If the HRA is integrated with a group plan, additional rules apply. There may be coordination requirements or notices involved. Employers should ensure all legal obligations are met. Professional support may be helpful here as well.

The Key Components of a Section 105 Plan Document

These types of plans require strict regulation of plan documents. At minimum, the Section 105 HRA plan document must include:

• The name of the Section 105 plan administrator, whether a company or individual
• The name of any designated fiduciary who decides claim procedures or benefit appeals, if it is someone other than the plan administrator
• A description of the benefits provided through the plan
• Eligibility criteria for the plan, such as minimum working hours, classes of employees, and any waiting period that is required prior to enrolling in the plan
• A standard of review for benefit decisions
• Any amount the participant must pay towards coverage to be eligible for participation
• The effective date of participation in the plan, typically either the next day or the first day of the following month after eligibility requirements are met
• The plan sponsor’s amendment and termination rights, and a definition of what occurs to plan benefits if the plan is terminated
• Explanation of how benefit provisions are coordinated
• Procedure for designating any administrative duties to a Section 105 TPA
• Definition of how the Section 105 plan is funded
• Specific information regarding COBRA, HIPAA, ACA and any other federal mandates

Final Thoughts

A Section 105 HRA is a powerful tax-saving strategy for small employers and sole proprietors. It provides flexibility and financial relief for healthcare costs.
But a written plan document is essential to maintain compliance. Without it, the tax benefits may be lost.

The plan document serves as the legal foundation of the HRA. It defines rules, processes, and limits. It ensures everyone understands how the plan works.
And it protects the business in an IRS audit.

Employers must keep the plan updated and administered correctly. Claim records should be stored, and employee notices should be issued. A proactive approach ensures compliance. And it maximizes the plan’s financial value.

Working with a knowledgeable advisor or administrator is recommended. They can help draft and maintain the plan document. They also assist with annual updates and compliance checks. This gives the business peace of mind.