Understanding Section 105 Reimbursement Plans – Zupnick Associates

(by Andres Rojas)

 

Offering healthcare benefits is one of the best ways to attract and retain high-value employees. Indeed, the pandemic has radically increased the importance of health benefits. These days, workers with an employee-based health plan can use it to pay for most of their health expenses – including preventive care, dental treatments, and drug cost 

However, even the most comprehensive health plans demand that the employee meets a deductible before the co-payments start kicking in. Until then, the employee must pay entirely out of his own pocket.

But what if your employees can’t afford to pay their premiums? Then offering a section 105 healthcare plan might just be the solution.

What Is a Section 105 Plan?

Section 105 plans are named after section 105 of the IRS regulations. These plans allow employers to reimburse workers for their medical expenses.

Section 105 plans aren’t medical insurance, so employees have no obligation of paying for monthly premiums. Instead, they offer a flexible solution to employees’ health needs.

The way they work is simple:

  • First, the employer creates a self-funded health plan that meets section 105 requirements.

  • Second, the employer reserves a fixed amount of money for each employee’s annual health expenses.

  • Third, the worker pays for his medical expenses out of his own pocket before submitting them to his employer.

  • Fourth, the employer will reimburse the employee’s qualified health expenses until his annual limit is met.

Section 105 plans are often used to pay for out-of-pocket costs but they can also fund health insurance premiums. Other benefits of section 105 plans include:

  • They aren’t subject to income or payroll taxes.

  • They are less expensive for employers than group healthcare plans.

  • They allow businesses to increase their tax deductions.

  • They comply with ACA regulations.

So, if offering a group health plan is too expensive, this might be the perfect solution to your employee benefits needs.

What Qualifies as a Section 105 Healthcare Plan?

Section 105 plans must comply with both ACA and IRS regulations. Although ACA requires that employers provide medical insurance to their employees, the rules may vary for small employers (businesses with 50 or fewer full-time employees).

According to section 105, eligible plans must:

  • Only accept the employer as the sole contributor.

  • Not deduct any medical expenses from the employee’s salary.

  • Set an annual maximum dollar amount to reimburse eligible health expenses.

  • Not reimburse health expenses already reimbursed by other plans.

  • Exclude reimbursements for eligible medical expenses from gross taxable income.

Although there are many types of section 105 plans, the most common type falls under the umbrella term of Health Reimbursement Arrangement (HRA) plans.

What Is a Health Reimbursement Arrangement (HRA) Plan?

HRAs are section 105 plans that provide reimbursements for medical expenses. Depending on how they’re configured, HRAs can even provide immediate reimbursement if the employer supplies his covered employees with an HRA debit card. 

Unlike health insurance, HRAs only cover costs related to preventing or treating health-threatening ailments. General health expenses, like vitamins or teeth withering, are outside their scope.

HRAs come in many shapes and sizes. Some of the most relevant ones include Individual Coverage HRA (ICHRA), Group Coverage HRA (GCHRA), and Qualified Small Employer HRA (QSEHRA).

What Is Individual Coverage HRA (ICHRA)?

ICHRA plans are tailored to fit businesses of all sizes. Unlike other types of HRAs, ICHRAs allow individuals to buy individual market health insurance. Under an ICHRA plan, covered workers can get reimbursements for their individual insurance premiums and other qualified medical expenses without the need to be a part of a group health plan.

What Is Group Coverage HRA (GCHRA)?

As their name suggests, GCHRAs are linked with group health insurance plans. GCHRAs are well-suited for high-deductible health insurance plans, as they can help employees cover the costs of their premiums and out-of-pocket expenses while their deductibles kick in.

What Is a Qualified Small Employer HRA?

QSEHRAs are HRA plans for small businesses with less than 50 full-time employees.

QSEHRAs allow small business owners who can’t afford a group health insurance plan to make health reimbursements for qualified medical expenses.

What Medical Expenses Are Covered by HRA Plans?

Since they are wholly funded by employers, HRA plans are very flexible in design. Companies can tailor their HRA plan around their health benefits, therefore limiting their employees’ medical expenses without reducing their coverage.

Among other things, HRA plans can cover:

  • Premiums, copayments, and deductible expenses.

  • Vision care.

  • Dental care.

  • Prescription and over-the-counter medications.

Section 105 plans allow employers of all sizes to offer attractive employee medical benefits. So if you still aren’t sure if HRAs are good for your business, contact us and let us help you create a customized section 105 healthcare plan that fits your needs.

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