What Is a Section 105 Plan and How Does It Work

Finding affordable ways to provide health benefits remains a challenge for growing businesses. A Section 105 plan offers one solution that delivers tax advantages while giving employers flexibility in how they support employee healthcare costs. Understanding what a Section 105 plan is and how it functions can help you decide if this approach fits your organization.

Defining Section 105 Plans

A Section 105 plan is an employer-sponsored health benefit authorized under Section 105 of the Internal Revenue Code. It allows businesses to reimburse employees for qualifying medical expenses on a tax-free basis. Unlike traditional group health insurance, where employers pay premiums to carriers, Section 105 plans let companies pay employees directly for healthcare costs they've already incurred.

The IRS permits these reimbursements to cover a wide range of medical expenses as defined in Section 213(d) of the tax code. This includes health insurance premiums, deductibles, copays, prescription medications, dental care, vision expenses, and many other qualified healthcare costs.

Health Reimbursement Arrangements, commonly called HRAs, represent the most popular form of Section 105 plan. Other variations include Medical Expense Reimbursement Plans and certain self-insured health arrangements.

How Section 105 Plans Work

The mechanics of a Section 105 plan are straightforward. Employers establish a written plan document outlining which expenses qualify for reimbursement, how much they'll contribute, and which employees can participate. When employees incur eligible medical expenses, they submit documentation for verification. The employer then reimburses those costs up to the established allowance.

These reimbursements flow tax-free to employees, meaning the money isn't counted as gross income. For employers, the reimbursements qualify as deductible business expenses. This creates Section 105 advantages for both parties compared to simply paying higher wages that employees would use for healthcare.

According to the KFF 2025 Employer Health Benefits Survey, 33% of covered workers enrolled in high-deductible health plans with Health Reimbursement Arrangements receive employer contributions that equal or exceed their deductible amount. This demonstrates how Section 105 plans help employees manage out-of-pocket costs while giving employers control over their healthcare spending.

Section 105 Plan Benefits for Employers

Small business owners and growing companies find several Section 105 plan benefits attractive.

Predictable Healthcare Costs

With a Section 105 plan, you set the reimbursement amount upfront. Your maximum expense is known before the plan year begins, unlike traditional insurance, where premiums can fluctuate based on claims experience or market conditions.

Tax Savings

Employer contributions to Section 105 plans are deductible as ordinary business expenses. You also avoid payroll taxes on these amounts, creating meaningful savings compared to increasing employee wages by equivalent amounts.

Flexibility in Plan Design

Employers choose which expenses the plan covers, set contribution limits, and determine eligibility criteria. For startups and enterprise organizations alike, this flexibility allows tailoring benefits to workforce needs and budget constraints.

Section 105 Plan Benefits for Employees

Workers participating in Section 105 plans gain valuable advantages as well.

Tax-Free Reimbursements

Medical expense reimbursements under Section 105 don't count as taxable income. Employees receive the full value of reimbursements without federal, state, or FICA taxes, reducing the benefit.

Reduced Out-of-Pocket Burden

When employers contribute to healthcare costs through a Section 105 plan, employees spend less from their own pockets on medical care. This proves especially helpful for workers managing chronic conditions or families with ongoing healthcare needs.

Coverage for Diverse Expenses

Depending on plan design, employees can receive reimbursement for expenses not covered by traditional insurance, including certain dental procedures, vision care, mental health services, and preventive treatments.

Section 105 Plan Eligibility Requirements

Understanding Section 105 plan eligibility helps employers structure compliant benefits.

Who Can Participate

Generally, any W-2 employee can participate in an employer's Section 105 plan. This includes full-time and part-time workers, though employers can establish different eligibility rules for different employee classes. Spouses and dependents of eligible employees typically qualify for coverage under the plan as well.

Who Cannot Participate

Self-employed individuals, sole proprietors, and partners in a partnership cannot directly participate in their own Section 105 plan. However, they can establish plans for their employees and, in certain business structures, cover family members who work as legitimate employees.

Compliance Considerations

Section 105 plans must follow IRS nondiscrimination rules, meaning highly compensated employees cannot receive disproportionately better benefits than other workers. Plans also need proper documentation, HIPAA privacy compliance, and adherence to ERISA requirements when applicable.

Types of Section 105 Plans

Several Section 105 plan structures serve different business situations.

Individual Coverage HRA (ICHRA)

ICHRAs allow employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses. Brokers often recommend this option for companies seeking alternatives to traditional group coverage.

Qualified Small Employer HRA (QSEHRA)

Businesses with fewer than 50 employees that don't offer group health insurance can use QSEHRAs. These plans have IRS-set contribution limits and require uniform allowances for all eligible employees.

Group Coverage HRA

Employers offering traditional group health plans can add an HRA to help employees cover deductibles, copays, and other out-of-pocket expenses not paid by the underlying insurance.

How Venteur Simplifies Section 105 Administration

At Venteur, we make implementing Section 105 plans through ICHRA straightforward for businesses of all sizes. You determine contribution amounts while our platform handles compliance, documentation, and reimbursement processing.

The employer experience keeps administration simple with automated eligibility tracking and 50-state compliance built in. Meanwhile, the employee experience guides workers through selecting individual coverage and submitting expenses for reimbursement.

Getting Started with Section 105 Plans

A Section 105 plan can transform how your business approaches employee healthcare. The combination of tax savings, cost control, and flexibility makes these arrangements worth exploring for companies seeking smarter benefits solutions.

Contact Venteur to learn how a Section 105 plan could work for your organization.