A medical reimbursement plan is any plan where an employer
reimburses an employee for uninsured health or accident expenses incurred by the employee or his
dependents. The most common type of Section 105 plan is a self-funded health plan, where the
employer has chosen not to insure health care benefits and to self-fund these benefits rather than
pay premiums to an insurer. Section 105 plans are also frequently found inside Section 125 Cafeteria
Plans in the form of Medical Flexible Spending Accounts (FSAs). It is acceptable, however, to
implement a medical reimbursement plan alongside a conventional health insurance plan (to reimburse
amounts not covered by insurance) and outside of a cafeteria plan.
What are advantages of
Section 105 plans offer great advantages to both the employer and the employees.
The medical expense reimbursements are tax deductible by the employer and the employer has
great flexibility in the design of the plan's provisions, such as establishing maximums amounts for
reimbursement and setting eligibility requirements for participation. The biggest advantage to
employees is that the plan's reimbursement payments are not considered taxable income to the
employees, provided that they have not taken a medical expense deduction for these amounts on their
personal tax return.
Can an employer corporation administer the MRP?
answer is yes, but I do not recommend self-administration for two reasons – first, correctly
determining whether expenses meet the criteria under Code Section 213 for reimbursement requires
fairly extensive knowledge, creating the risk of noncompliance due to improper reimbursements;
secondly, when the employer must deny a reimbursement request, it can generate an troublesome
situation between employer and employee which is not desirable.
What are the requirements
for Section 105 plans?
The principal requirements to qualify under Section 105 are to
adopt a written plan document, all participants must be employees, expenses to be reimbursed must
not be subject to reimbursement under any health insurance policy, and the plan must meet the
nondiscrimination requirements specified under the Code. In addition, if employee contributions are
made under the plan, these become plan assets subject to ERISA and must be held in trust, pursuant
to a written trust instrument. Because Section 105 medical reimbursement plans are considered group
health plans, they are subject to the requirements for such plans under ERISA, COBRA, FMLA and
HIPAA. Certain Section 105 plans must also comply with HIPAA’s privacy rules, depending on the
HIPAA effective date guidelines (see discussion below).
What are the nondiscrimination
requirements under Section 105?
The plan must not discriminate in favor of highly
compensated employees with respect to eligibility to participate or benefits provided under the
A plan discriminates as to eligibility unless it benefits:
80% or more of all employees eligible to
benefit under the plan, if 70% or more of all employees are eligible to benefit under the plan, or
Is one of the five
highest-paid officers of the employer
Is in the top 25% of
highest paid employees
What happens if the plan is discriminatory?
plan is discriminatory, then all or part of the medical benefits paid for the benefit of a highly
compensated employee will be taxable to that employee.
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