This document includes a brief summary of the three basic types of Section 105 Medical Reimbursement Plans. Keep in mind that a significant advantage of these plans is Employer flexibility. Each of these basic plan models can be customized and designed to meet specific needs and goals of employers. A second primary advantage of these plans is Employer control. Accounts are not portable, and any funds not reimbursed to active participants are forfeited and remain with the employer.
Simple Deductible Reimbursement Plan
A Deductible Reimbursement Plan ("DRP") is the most basic form of a Section 105 plan. A DRP is typically used in conjunction with a medium-to-high deductible health plan and is designed to reimburse individuals (and eligible dependents) for some portion of their deductible. Coinsurance reimbursement is also available upon employer choice.
The benefits of a DRP can be significant - typically including premium savings for the employer (from self-funding a portion of a higher deductible as opposed to paying higher premiums for lower deductible plan) in addition to tax-free reimbursement for the employees.
Reimbursements are made based on insurer Explanation of Benefit forms ("EOBs") for deductible-eligible expenses in an amount/schedule determined by the employer. Reimbursement may be tracked in several different ways, including by total dollar amount (blind to the specific individual incurring the expenses) or by the individual incurring the expense within reimbursement "tiers." The best option is often either dollar tracking or matching to the specific health plan reimbursement.
Linked vs. Unlinked Plans: As with other Section 105 plans, a DRP may be "linked" or "unlinked" to the group health plan. "Linked" indicates that every individual who is covered under the group health plan is automatically a participant in the DRP. Anyone not a participant in the group health plan is not offered the DRP. Most DRPs are linked plans.
Intermediate Plan Design: Plan with Multiple Components
An example of an intermediate plan design option is a deductible reimbursement plan (with or without coinsurance reimbursement) with 1-2 additional categories of expenses eligible for plan reimbursement. Typically, the additional categories of expenses include (1) physician copays, (2) prescription copays, or (3) dental or vision expenses (see below).
Many employers combine deductible reimbursement with a second category that serves as a self-funded plan allowing the employer to avoid premium payments for a particular insurance plan. For instance, a dental reimbursement plan (or vision reimbursement plan) can be included with a basic DRP to have a two-part plan that reimburses participants for both (1) deductible-eligible expenses and (2) dental expenses up to a particular reimbursement maximum for each category.
Again, the overriding key to Section 105 plans is flexibility, and this is one example of the flexibility in practice.
Advanced Plan Design: Health Reimbursement Arrangement
A Health Reimbursement Arrangement ("HRA") is an employer-funded account that reimburses all or a majority of expenses eligible for tax-free reimbursement under IRS Code Section 213(d). Eligible 213(d) expenses include most all out-of-pocket expenses for medical, dental, and vision that are not covered by insurance or reimbursed from another source. For participants, this plan operates like an FSA plan except that it is fully funded by the employer with no participant contributions.
The HRA option is valuable for employers seeking to implement a consumer-driven health option to encourage employees to act more like consumers and make wise expenditures for healthcare expenses.
HRAs have the option of allowing carryover of unspent employee balances to the next plan year. The most advanced HRA plan includes reimbursement of all 213(d) expenses, carryover, and coordination with an FSA plan. This option, which operates much like an HSA plan except with greater employer control of contributions, is an excellent consumer-driven health option with significant benefits for employers and employees.
As with DRPs, HRA plans may be Linked or Unlinked. Many employers wishing to implement an HRA as a consumer-driven health option use an Unlinked plan.
Keep in mind that a substantial advantage of Section 105 plans is employer flexibility. ProBenefits will work with employers and benefits advisors to develop an appropriate plan design for each situation.
For more information on any of these plan design options: