What is a Section 105 Health Reimbursement Arrangement?

Medical Reimbursement Plans (also known as "Health Reimbursement Arrangements" or "Section 105 plans" because they are established under IRS Code Section 105 and related revenue ruling) are tax-favored benefit plans that allow employers to fund selected medical expenses for employees on a tax-free basis. Many employers use these plans as simple self-funding vehicles with tax advantages and employer control.

Medical Reimbursement Plans can be designed to accomplish specific goals:

• To cover the additional exposure of a higher deductible health insurance plan;
• To reduce insurance premiums by self-funding budgetable first-dollar costs;
• To self-fund a dental or vision plan or pharmacy benefit; or
• To create a consumer-driven health plan option, giving employees an incentive to act as consumers and make wise expenditures (such as with an HRA/FSA combination).

The key advantage of these plans is EMPLOYER FLEXIBILITY. The employer has many options, ranging from a simple deductible reimbursement plan to a "full" HRA plan that reimburses out-of-pocket medical/dental/vision expenses eligible for tax-free reimbursement under IRS Code 213(d). The employer determines which expenses are eligible for reimbursement, the reimbursement schedule and amounts, and any unique plan features (such as whether unspent balances carryover to the next plan year).

The tax advantages of the plan are significant to the employer and employees. Reimbursements are tax-deductible to the employer and non-taxable (no federal income tax, state income tax, or FICA tax withholdings) to the employee.

Section 105 plans can work effectively with Flexible Spending Accounts ("FSAs"), tax-favored plans that allow employees to set aside pre-tax dollars to fund out-of-pocket medical, dental, and vision expenses.

Importantly, Section 105 plans may be used with any insurance coverage or plan deductible amounts. Many employers also find it helpful to have a 105 plan administered by an independent plan service provider, since the plan can remain in place despite changes in health carriers and plan designs.