Introduction to Section 105 Eligible Expenses
Section 105 plans allow employers to reimburse employees for medical expenses on a tax-free basis. These plans offer tax benefits for both the business and employees. To maintain compliance, only specific expenses may be reimbursed. The IRS outlines these eligible costs under Section 213(d) of the tax code.
Understanding which expenses qualify is essential for proper plan administration. Employers must follow strict rules to ensure tax-free treatment of reimbursements. All eligible expenses must be documented and submitted properly. Ineligible expenses may result in plan disqualification or tax penalties.
This article explains the most common Section 105 eligible expenses. It also highlights the documentation required to support reimbursements. Expenses must be medical in nature and not for general health or cosmetic purposes. Employers should reference IRS Publication 502 as a guide.
The list of eligible expenses is extensive. However, each plan may customize its own list within IRS limits. Employers must define these items clearly in the plan document. Clear guidelines help avoid confusion and ensure compliance.
Common Eligible Medical Expenses
Section 105 plans may reimburse most traditional medical expenses. These include amounts paid for the diagnosis, treatment, or prevention of disease. The expense must be primarily for medical care and not simply beneficial to general health.
Here are common examples of reimbursable expenses:
- Doctor and hospital visits
- Prescription medications
- Lab tests and diagnostic services
- Surgeries and medical procedures
- Chiropractic care
- Dental exams and treatments
- Vision exams, glasses, and contact lenses
- Mental health therapy and counseling
- Physical therapy
- X-rays and MRIs
Each of these must be medically necessary. Cosmetic procedures are not allowed unless they result from injury or illness. For example, breast reconstruction following mastectomy is permitted, but teeth whitening is not.
All reimbursements require proper documentation. Receipts, invoices, and proof of payment must be submitted. The date, provider, and purpose of the expense must be clearly shown. Claims without proper evidence may be denied.
Employers should enforce strict reimbursement procedures. Employees must submit claims by a set deadline. Expenses must occur within the plan year. This ensures proper recordkeeping and audit protection.
Insurance Premiums and Long-Term Care
Section 105 plans may also reimburse insurance premiums. This includes a wide range of health-related policies, as long as the premiums are paid by the employee or their spouse. The plan then reimburses those payments tax-free, provided all IRS conditions are met.
Eligible premium categories include:
- Major medical insurance
- Dental and vision insurance
- COBRA continuation coverage
- Medicare Parts A, B, C, and D
- Long-term care insurance
- Student health insurance
- Qualified high-deductible health plans
- Qualified small employer health plans
Premium reimbursements must follow IRS limits. Long-term care premiums are subject to age-based caps, which are updated annually by the IRS. Employers should verify the current limits each year to maintain compliance.
Premiums paid through a Section 125 cafeteria plan may not qualify for reimbursement. The IRS prohibits “double-dipping,” which means you cannot receive both tax-free payroll deduction and tax-free reimbursement. Employers should verify the payment method before approving premium reimbursements.
The plan document must clearly state whether premiums are included. Any exclusions, limitations, or special rules should also be written in the plan. This transparency protects both the employer and employees and helps maintain IRS compliance.
Lesser-Known Eligible Expenses
Section 105 plans may also cover lesser-known but highly valuable expenses. These costs may not be top of mind but are still eligible when medically necessary and supported with documentation. They must meet the IRS requirement of being primarily for medical care.
Examples of lesser-known eligible expenses include:
- Acupuncture
- Fertility treatments
- In vitro fertilization (IVF)
- Smoking cessation programs
- Weight-loss programs prescribed by a doctor
- Birth control and contraceptives
- Breast pumps and lactation supplies
- Diabetic supplies and insulin
- Guide dogs for the visually impaired
- Special education for learning disabilities
Transportation related to medical care may also be reimbursed. This includes mileage, tolls, and parking fees for travel to and from appointments. The purpose, location, and distance must be documented to qualify. Travel expenses must directly relate to obtaining medical treatment.
Some over-the-counter medications are now eligible for reimbursement. As of 2020, IRS rules allow reimbursement for nonprescription items like pain relievers, allergy medications, and cold remedies. Menstrual care products are also included under updated rules. These items no longer require a prescription to qualify.
All of these expenses require proper documentation. Itemized receipts must be submitted with each claim. In some cases, a doctor’s note or diagnosis may be required. Employers should ensure these records are maintained for auditing purposes.
Ineligible or Limited Expenses
Not all expenses qualify for reimbursement under Section 105. The IRS strictly limits the types of expenses that can be reimbursed tax-free. Reimbursing ineligible items can jeopardize the tax-free nature of the plan and lead to penalties or disqualification.
Common ineligible expenses include:
- Cosmetic surgery not related to illness or injury
- Gym memberships
- Vitamins and nutritional supplements (unless prescribed)
- Household help or child care
- Health club dues
- Toiletries and personal hygiene products
- Maternity clothes
- Non-prescription sunglasses
- Insurance premiums already paid pre-tax
- Funeral and burial costs
Expenses that are for general well-being, appearance, or convenience do not qualify. The IRS requires that all reimbursed costs be for the diagnosis, cure, treatment, or prevention of a specific illness or condition. General health products that are not prescribed are usually disqualified.
Employers should clearly list excluded expenses in the plan document. This prevents confusion among employees and helps avoid errors in reimbursement. By defining both eligible and ineligible costs, businesses can maintain a compliant and efficient plan.
Some expenses may fall into a gray area. For example, nutritional supplements or weight-loss programs may be eligible if prescribed to treat a specific condition. A doctor’s letter may help validate these claims. However, caution should be used with these items.
| Expense Type | Examples |
|---|---|
| Medical Services | Doctor visits, surgery, physical therapy |
| Dental Care | Cleanings, fillings, orthodontics |
| Vision Expenses | Eye exams, glasses, contact lenses |
| Prescription Drugs | Medications prescribed by a licensed provider |
| Travel for Care | Mileage, tolls, parking to and from appointments |
Final Thoughts
Section 105 plans are a flexible and tax-efficient way to reimburse employees for qualified medical expenses. Employers who use these plans must stay within IRS guidelines to maintain tax-free status. Understanding which expenses are eligible is the first step toward successful plan management.
Eligible expenses include medical, dental, vision, mental health, and qualified insurance premiums. Lesser-known items like fertility treatments, diabetic supplies, and travel expenses may also qualify. Every reimbursed expense must be primarily for medical care and properly documented.
Ineligible expenses are just as important to understand. Items like cosmetic surgery, gym dues, and over-the-counter vitamins are not eligible without a medical prescription. Reimbursing these can result in penalties and a loss of tax benefits.
Employers must clearly outline covered and excluded expenses in the plan document. Reimbursement procedures, deadlines, and documentation rules should also be detailed. This protects both the business and the employees using the plan.
When structured and managed correctly, Section 105 plans offer substantial tax savings. They allow employers to support their team’s health while controlling costs. Proper knowledge of eligible expenses ensures long-term compliance and success.
