Section 105 plans are medical expense reimbursement plans. Such reimbursements can include health insurance, co-pays, vision care expenses and other related medical expenses.
The enactment of a Section 105 plan also allows employees and business owners access to medical coverage, which is a considerable saving since out-of-pocket costs to visit a hospital can be financially devastating.
In this post, we will show you how to set up a section 105 plan. We will point out a few of the advantages and disadvantages. We will also give you some tips along the way.
Table of contents
There are many advantages to these plans. Let’s take a look at a couple:
- Flexibility. A Section 105 plan can be designed to fit the business’ needs and budget. A qualified plan administrator will work with the business owner to ensure that the company chooses the best option to fit the needs and goals of the business. A qualified CPA can help the business owner select the type of plan that provides the greatest tax benefits according to the company’s legal structure.
- Retention of employees. Offering qualifying medical, dental, and vision benefits to employees is very important and can improve employee retention rates. Employees who receive these benefits will be less likely to leave the company to seek other opportunities where such coverage is offered.
In the table below, we show you some of the expenses that are deductible:
|Dental Visits & Fees
|Vision Care & Eyeglasses
|Health Insurance Premiums
A business may administer its own Section 105 plan using software, but this is generally not recommended because errors in plan administration can be highly costly and subject to high penalties.
It is usually cost-effective to choose a qualified plan administrator who can ensure that the business is protected and meets the legal requirements.
Specific legal requirements include the following:
- COBRA – plans with 20 or more participants must offer COBRA benefits that allow an employee to continue receiving medical benefits after termination. The employee must pay for the cost of their plan, but this provides plan continuance until another employer is found.
- IRS plan documentation – Section 105 plans must comply with IRS requirements, including defined expense eligibility, employer contribution amounts, and proper documentation of expenses paid.
- Health Insurance Portability and Accountability Act (HIPAA) – HIPAA requirements require that protected health information be given to the company processing reimbursement claims and held confidentially.
- Employee Retirement Income Security Act (ERISA) – Under ERISA, Section 105 plans are included as employee welfare plans. Summary plan descriptions and information must be provided to each employee. Employers cannot endorse any specific health insurance plan and must not directly pay for a particular plan.
- Patient Protection and Affordable Care Act (ACA) requires that no annual or lifetime limits be placed on essential health benefits. Employees also cannot wait over 90 days for health care reimbursement, and plans must allow coverage for individuals up to age 26 under their parents’ plans.
Section 105 plans can significantly benefit a business owner and its employees. Still, it is imperative to ensure that the plan is compliant with all Department of Labor and IRS regulations and set up correctly.
The business owner should choose a reliable CPA and plan administrator to assist with these tasks. Asking the questions listed above should help ensure that the monies spent hiring such individuals are well-spent.
Components of Section 105 Plan Documents
Section 105 plans require specific documents to comply with IRS and Labor Department regulations. Most Section 105 plans are self-funded (or self-insured), but some companies choose to enact reimbursement plans such as Health Reimbursement Arrangements (HRA’s) or Healthcare Reimbursement Plans (HRPs).
These types of plans require strict regulation of plan documents. At a minimum, they must include:
- The name of the Section 105 plan administrator, whether a company or individual
- The name of any designated fiduciary who decides claim procedures or benefit appeals, if it is someone other than the plan administrator
- A description of the benefits provided through the plan
- Eligibility criteria for the plan, such as minimum working hours, classes of employees, and any waiting period that is required before enrolling in the plan
- A standard of review for benefit decisions
- Any amount the participant must pay towards coverage to be eligible for participation
- The effective date of participation in the plan, typically either the next day or the first day of the following month after eligibility requirements are met
- The plan sponsor’s amendment and termination rights and a definition of what occurs to plan benefits if the plan is terminated
- Explanation of how benefit provisions are coordinated
- Procedure for designating any administrative duties to a Section 105 TPA
- Definition of how the Section 105 plan is funded
- Specific information regarding COBRA, HIPAA, ACA, and any other federal mandates
How to Set Up a Section 105 Plan
Let’s walk through the steps to setting up a section 105 plan:
- Consider entity structure
Remember that these plans work best for sole proprietors and C-corporations. The most popular entity structure for successful small business is an S-Corp. As such, your entity structure is very important to determining is a plan makes sense for you.
- Review with your CPA
Before you set up a plan, consider what your annual medical expenses are and whether a different structure could work well for you. You should consider a 401h account or an HSA. Your CPA can also review your tax bracket and determine your expected tax savings.
- Consider plan options
There is some customization allowed for these plans. Make sure you consider the following:
1. Consider what employees should be eligible
2. Determine timing of reimbursements
3. Select a claims administrator
4. Consider eligible expenses
5. Specify any exclusions
6. Determine an opt-out provision
7. Select employer contribution limits
8. Determine dependent eligibility
9. Examine reimbursement ordering rules
10. Draft employee handbooks and materials
- Review document providers
While you could create a plan yourself by following the IRS guidelines, this is not advisable. Take a look at a few of the plan administrators and document providers in the marketplace. There are different fee structures and administrative requirements. So make sure to do your due diligence.
- Address reporting requirements
Depending on the number of employees and the plan structure, there are some reporting and administrative requirements. You may have to file form 5500.
As you can see, we are big fans of section 105 plans. Hopefully, we gave you some information and showed you how to set up a section 105 plan.
You should also consider a 401h plan. Whatever option you choose, make sure you review your situation and entity structure with your CPA and financial advisor.