Section 105 Health Reimbursement Arrangements

HRA, ICHRA, QSEHRA & Medical Expense Reimbursement Plans

• Section 105 is part of the tax law that allows certain employer health reimbursement arrangements to reimburse employees for eligible medical expenses. In plain English, this page is about when an employer may reimburse employees for health insurance premiums, deductibles, copays, coinsurance, and other qualified medical expenses.
• This is a technical area. I am a California health insurance agent, not a tax accountant, attorney, payroll company, or third-party administrator. Before setting up any HRA, ICHRA, QSEHRA, MERP, or reimbursement plan, review the rules with your CPA, attorney, payroll provider, or plan administrator.

Start Here: Which Type of Arrangement Are You Asking About?

• What Is a Health Reimbursement Arrangement?
  • A Health Reimbursement Arrangement, often called an HRA, is an employer-funded arrangement that may reimburse employees for qualified medical expenses up to limits set by the plan. HRAs are employer-funded; they are not the same as Health Savings Accounts, which are individually owned accounts tied to HSA-qualified health plans. For HSA rules, see our page on Health Savings Accounts (HSA).
  • For official background, see the IRS discussion of HRAs in IRS Publication 969, the IRS guide to medical expenses in IRS Publication 502, and the federal Marketplace explanation of Health Reimbursement Arrangements.
• ICHRA: Individual Coverage HRA
  • An ICHRA allows an employer to reimburse employees tax-free for qualified medical expenses, including individual health insurance premiums, if the arrangement is set up correctly and the employee has qualifying individual coverage. This may be useful when an employer wants to help employees buy individual coverage instead of offering a traditional group health plan.
  • However, ICHRA offers can affect whether an employee may receive premium tax credits through Covered California or another Marketplace. Employees should use the official HRA affordability tools before assuming they can keep a subsidy.
  • Learn more: ICHRA – Individual Coverage Health Reimbursement Arrangement
• QSEHRA: Small Employer HRA
  • A QSEHRA is designed for certain small employers, generally those with fewer than 50 full-time equivalent employees that do not offer a group health plan. A QSEHRA may reimburse eligible employees for certain medical expenses, including health insurance premiums, if the rules are followed.
  • For official information, see Healthcare.gov’s QSEHRA page and IRS Publication 15-B.
  • Learn more: QSEHRA for Small Employers
• MERP: Medical Expense Reimbursement Plan
  • A Medical Expense Reimbursement Plan, sometimes called a MERP, is a Section 105 arrangement that may reimburse employees for eligible medical expenses such as deductibles, copays, coinsurance, dental, vision, or other expenses allowed by the plan document and tax rules.
  • For determining what may count as a medical expense, see IRS Publication 502. A written plan document and proper claims substantiation are very important.
  • Learn more: Section 105 Medical Expense Reimbursement Plans (MERP)
• Can an Employer Simply Pay for Individual Health Insurance?
  • Usually, the safer answer is: do not simply hand employees money for individual health insurance and assume it is tax-free or ACA-compliant. The reimbursement should generally be structured through a compliant arrangement such as an ICHRA or QSEHRA, depending on the employer’s size, whether the employer offers group coverage, and how the plan is designed.
• Learn more: Can My Business Reimburse Employees for Individual Health Insurance?
  • How Section 105 Fits With Other Employer Tax Strategies
  • Section 105 is about reimbursement arrangements. That is different from Section 106 employer-paid health insurance deductions, small business health insurance tax credits, and Health Savings Accounts.
  • If your goal is to offer group health insurance, start with California employer health insurance carriers or request an instant employer proposal. If your goal is to look at an alternative funding method, see Level-Funded Health Insurance Plans.
• Discrimination, Carve-Outs & Employee Classes
  • Employers should be careful about offering better reimbursement benefits only to owners, executives, managers, or highly compensated employees. Different arrangements have different nondiscrimination and employee-class rules. For related background, see our page on management carve-outs and discrimination rules.
• Covered California, Subsidies & HRA Affordability
  • If an employee is offered an ICHRA or QSEHRA, that offer may affect whether the employee can receive financial help through Covered California. The key issue is often whether the HRA is considered affordable under federal rules.
  • Employees should review Covered California’s HRA information and use the Covered California HRA Affordability Calculator before assuming they can keep premium assistance.
• Official Government References
• Internal Revenue Code Section 105
• Internal Revenue Code Section 106
• IRS Publication 15-B – Employer’s Tax Guide to Fringe Benefits
• IRS Publication 969 – HSAs and Other Tax-Favored Health Plans
• IRS Publication 502 – Medical and Dental Expenses
• Healthcare.gov – Deciding Between Group Coverage and an HRA
• Healthcare.gov – Individual Coverage HRA
• Healthcare.gov – QSEHRA for Small Employers
• CMS – Health Reimbursement Arrangements
• Covered California – Health Reimbursement Arrangements
• Covered California HRA Affordability Calculator

Bottom Line

Section 105 arrangements can be useful, but they are not do-it-yourself tax tricks. The employer must choose the correct type of arrangement, follow the written plan rules, substantiate claims, avoid improper discrimination, and understand how the arrangement affects employee eligibility for Covered California subsidies.

If you are a California employer trying to decide between a traditional group plan, ICHRA, QSEHRA, MERP, level funding, or another approach, we can help you compare the health insurance options and then coordinate with your CPA, attorney, payroll company, or HRA administrator.