What is a Section 105 plan?

Section 105, in plain terms

Section 105 of the IRS code is what allows an employer to reimburse an employee for medical costs without that money being taxed. Any compliant employer medical-reimbursement plan is, at its core, a Section 105 plan. It''s the legal engine under modern HRAs.

Section 105 plans vs HRAs

The terms overlap. Section 105 is the tax-code provision; an HRA is the specific, regulated way employers use it today. ICHRA and QSEHRA are HRAs built on Section 105. So when someone says "Section 105 plan," they usually mean a self-funded medical reimbursement plan or an HRA.

How a Section 105 plan works

• The employer establishes a written plan defining who''s covered and what''s reimbursable.
• Employees incur eligible medical expenses (and, for some plans, premiums).
• Employees substantiate the expenses.
• The employer reimburses them tax-free.

Who uses a Section 105 plan

• Small businesses reimbursing employees for individual coverage (via ICHRA or QSEHRA).
• Employers supplementing a group plan with an integrated HRA.
• Certain owner setups — for example, a Section 105 HRA covering a spouse-employee — subject to entity rules.

Section 105(h) nondiscrimination

Self-funded Section 105 plans are subject to Section 105(h) nondiscrimination rules, which generally prevent the plan from favoring highly compensated employees. The modern HRA frameworks build compliance in through their class and same-terms rules. A broker or administrator ensures your plan meets these requirements.

Owner setups

A specific use of Section 105 is the spouse-employee strategy, where a business owner legitimately employs their spouse and reimburses family medical costs through a Section 105 plan. Whether this works depends on bona fide employment and entity type, so it should be set up with a tax advisor — not assumed.

Staying compliant

A Section 105 plan needs a written plan document, nondiscrimination compliance, and substantiation of expenses to keep reimbursements tax-free. For most employers, that means adopting a compliant HRA (ICHRA or QSEHRA) that an administrator or broker maintains.

Section 105 and the ACA

Here is the modern catch. A standalone Section 105 plan that simply reimburses individual health-insurance premiums for active employees generally does not comply with the ACA on its own. To reimburse individual premiums today, the plan needs to fit an approved HRA framework — an ICHRA, QSEHRA, or excepted-benefit HRA. Section 105 is the tax mechanism underneath those arrangements, not a loophole around ACA rules.

Documentation a Section 105 plan needs

Like any HRA, a compliant Section 105 arrangement needs proper paperwork.

• A written plan document describing eligibility and benefits.
• A summary plan description for employees.
• A substantiation process for every reimbursement.
• Records retained in case of an audit.

The self-employed spouse strategy

A well-known small-business use of Section 105 is hiring a spouse as a bona fide employee and reimbursing the family's medical expenses through the plan. It can be powerful for the right situation, but it carries strict requirements around real employment and documentation, so it should only be set up with professional guidance.