In today’s evolving healthcare landscape, businesses of all sizes are searching for cost-effective ways to provide health benefits to their employees. One increasingly popular solution is the HRA 105 Reimbursement Plan. This plan offers flexibility, tax advantages, and the potential to significantly reduce healthcare costs for both employers and employees. But what exactly is an HRA 105 plan, and how can it benefit your business? This guide will explore everything you need to know, from the basics to the finer details.

What is an HRA 105?

An HRA 105 (Health Reimbursement Arrangement) is a type of employer-funded health benefit plan that allows businesses to reimburse their employees for eligible medical expenses. These expenses can include health insurance premiums, co-pays, deductibles, prescription drugs, and other out-of-pocket healthcare costs.

The “105” in HRA 105 refers to Section 105 of the Internal Revenue Code (IRC), which provides the legal framework for these types of reimbursement plans. Under this section, employers can reimburse employees for medical expenses on a tax-free basis, meaning neither the employer nor the employee has to pay taxes on the reimbursed amount.

HRA 105 plans are particularly appealing to small and mid-sized businesses because they provide a way to offer health benefits without the high cost of traditional group health insurance. Additionally, these plans give employers control over their healthcare spending while still providing valuable benefits to their workforce.

What is Section 105 of the Internal Revenue Code?

Section 105 of the Internal Revenue Code governs employer-provided health benefits, including Health Reimbursement Arrangements (HRAs). It allows employers to reimburse employees for qualified medical expenses on a tax-free basis. These reimbursements are considered non-taxable income for employees, and they can be deducted as a business expense by the employer.

Section 105 plans can be structured in various ways to meet the needs of different types of businesses. For example, some employers might use a Section 105 plan to reimburse employees for premiums they pay for individual health insurance policies. Others might use the plan to cover out-of-pocket expenses not covered by the company’s group health insurance plan.

In essence, Section 105 provides the legal framework that makes HRAs like the HRA 105 possible. It defines what qualifies as a reimbursable medical expense and ensures that these reimbursements are tax-advantaged for both the employer and the employee.

How Does an HRA 105 Plan Work?

An HRA 105 plan is typically set up as a formal arrangement between the employer and the employees. Here’s how it works:

1. Plan Design: The employer decides how much money they want to allocate to each employee’s HRA for the plan year. This amount is entirely at the employer’s discretion and can vary based on employee class, such as full-time, part-time, or seasonal workers.
2. Reimbursement Process: Employees incur eligible medical expenses and submit proof of these expenses to the employer or a third-party administrator. The employer then reimburses the employee from their HRA account.
3. Tax Advantages: The reimbursement is tax-free for the employee, and the employer can deduct the cost as a business expense. There are no payroll taxes associated with HRA reimbursements, which is a significant advantage for both parties.
4. Plan Flexibility: Employers can choose to roll over unused funds to the next plan year or set a “use it or lose it” policy, depending on the specific plan design. This flexibility allows businesses to control costs while still providing meaningful benefits to employees.

Benefits of an HRA 105 Plan

HRA 105 plans offer numerous benefits for both employers and employees:

1. Cost Control: Employers have complete control over how much they want to contribute to the HRA. This allows for predictable healthcare expenses and eliminates the variability associated with traditional health insurance premiums.
2. Tax Savings: Contributions made to an HRA 105 plan are tax-deductible for employers. For employees, reimbursements are not considered taxable income, resulting in significant tax savings for both parties.
3. Increased Flexibility: HRA 105 plans can be customized to suit the needs of different types of employees. Employers can choose to reimburse specific types of expenses or provide a broader range of coverage options.
4. Employee Satisfaction: Offering an HRA 105 plan can help attract and retain talent by providing employees with a valuable benefit that helps them manage healthcare costs.
5. Simplicity: Unlike traditional health insurance plans, HRA 105 plans are relatively simple to administer. Many businesses choose to work with a third-party administrator to handle the day-to-day management of the plan, further reducing the administrative burden.

What is a 105(h) Universal Reimbursement Account?

A 105(h) Universal Reimbursement Account is a specific type of HRA that is designed to comply with the nondiscrimination requirements set forth in Section 105(h) of the Internal Revenue Code. These rules ensure that the benefits provided by an HRA are offered fairly to all employees, regardless of their rank or compensation level.

The key features of a 105(h) Universal Reimbursement Account include:

• Uniformity: All employees within the same class (such as full-time workers) must be offered the same benefits under the HRA.
• Nondiscrimination: The plan must not favor highly compensated employees or key executives in terms of eligibility or benefits.

Employers who fail to comply with these nondiscrimination rules may lose the tax advantages associated with the HRA for their highly compensated employees. Therefore, it’s crucial for businesses to carefully design their HRA plans to ensure compliance with Section 105(h).

What is Section 105 for Self-Employed Individuals?

Self-employed individuals, including sole proprietors, partners in a partnership, and owners of S-corporations, generally cannot participate in an HRA 105 plan as employees. However, they can still benefit from Section 105 through a slightly different arrangement.

In these cases, a self-employed individual can hire their spouse as an employee of the business and establish an HRA 105 plan in the spouse’s name. The plan can then reimburse the spouse for qualified medical expenses, including those incurred by the self-employed individual and their family. These reimbursements remain tax-free for the spouse, and the business can deduct the cost as a business expense.

This strategy, known as the Section 105 Medical Reimbursement Plan, allows self-employed individuals to take advantage of the tax benefits associated with HRA 105 plans, even though they cannot directly participate in the plan as employees.

Implementing an HRA 105 Plan in Your Business

If you’re considering implementing an HRA 105 plan in your business, here are the steps you should follow:

1. Assess Your Needs: Determine how much you can afford to contribute to an HRA 105 plan and decide which employees will be eligible. Consider factors like the size of your workforce, the diversity of employee needs, and your overall budget.
2. Plan Design: Work with a tax advisor or a third-party administrator to design a plan that meets your needs while remaining compliant with IRS regulations. This includes deciding on reimbursement limits, eligible expenses, and rollover policies.
3. Communication: Clearly communicate the details of the plan to your employees. Ensure they understand how the plan works, what expenses are eligible for reimbursement, and how to submit claims.
4. Administration: Set up a system for managing reimbursements, whether in-house or through a third-party administrator. Make sure that your process is efficient and compliant with all legal requirements.
5. Monitor and Adjust: Regularly review your HRA 105 plan to ensure it continues to meet your business’s needs. Be prepared to make adjustments as necessary, particularly in response to changes in healthcare costs or tax laws.

Conclusion: Why an HRA 105 Plan Could Be Right for Your Business

An HRA 105 plan is a powerful tool that can help businesses of all sizes provide valuable health benefits to their employees while controlling costs and enjoying tax advantages. Whether you’re a small business owner looking to offer health benefits for the first time or a larger company seeking a more flexible alternative to traditional group insurance, an HRA 105 plan could be the solution you need.

At Molen & Associates, we specialize in helping businesses navigate the complexities of tax and benefits planning. If you’re considering an HRA 105 plan for your business, we can provide the expertise and guidance you need to implement it successfully.

Contact us today to learn more about how an HRA 105 plan can benefit your business and your employees.