Yes, Section 105 of the Internal Revenue Code allows employers to reimburse employees for health insurance premiums on a tax-free basis. The employer gets a full business deduction, and the employee pays zero income tax or payroll tax on the reimbursement.
The specific governing statute—IRC Section 105—creates a framework where employer-funded reimbursements for medical expenses, including insurance premiums, are excluded from an employee’s gross income. But the Affordable Care Act created a massive obstacle. In 2013, IRS Notice 2013-54 banned standalone Health Reimbursement Arrangements from reimbursing individual health insurance premiums. Employers who violated this rule faced penalties of $100 per day per affected employee—up to $36,500 per employee per year.
The 21st Century Cures Act of 2016 and later federal regulations in 2020 reopened the door by creating compliant plan types like the QSEHRA and ICHRA. According to the Kaiser Family Foundation, roughly 56% of Americans get health insurance through an employer—making Section 105 plans a critical tool for the millions of small businesses that can’t afford traditional group coverage.
Here’s what you’ll learn:
- 🔍 What Section 105 actually says and how it creates tax-free premium reimbursement
- ⚖️ Which Section 105 plan types legally reimburse premiums after the ACA
- 💰 The 2025 and 2026 QSEHRA contribution limits and how they affect your business
- 🚫 Common mistakes that trigger $100/day IRS penalties and how to avoid them
- 🏢 How sole proprietors, C-corps, S-corps, and partnerships each qualify differently
What Section 105 of the Tax Code Actually Says
Section 105 of the IRC governs how employers provide health benefits to employees. It establishes that amounts an employer pays to reimburse an employee’s medical expenses are tax-free to the employee, as long as the plan meets certain requirements. The employer gets a business deduction, and the employee does not report the reimbursement as income.
The IRS defines eligible medical expenses under Section 213(d) of the Code, which includes a broad range of health-related costs. Insurance premiums fall squarely within this definition. A Section 105 plan can reimburse individual health insurance premiums, dental premiums, vision premiums, Medicare premiums, COBRA premiums, and long-term care premiums—provided the plan is structured correctly.
A Section 105 plan is not health insurance. It is a reimbursement arrangement. The employer sets aside a monthly or annual allowance, and employees submit proof of eligible expenses. The employer then reimburses those costs tax-free, up to the allowance limit.
For federal compliance purposes, the IRS still classifies a Section 105 plan as a group health plan. This means it must comply with rules from the IRS, Department of Labor, ERISA, HIPAA, COBRA, and the Affordable Care Act. Ignoring any one of these obligations can result in steep fines.
How Section 105 Premium Reimbursement Works Step by Step
The employer starts by creating a formal written plan document that spells out which expenses qualify, how much each employee can receive, and the plan’s effective dates. Without this written document, the IRS can deny the tax benefits entirely.
Employees purchase their own individual health insurance on the open market or through the ACA marketplace. They then submit proof of their premium payments to their employer, often through a third-party administrator or benefits software. The employer reviews the documentation and reimburses the employee, typically on a monthly basis.
These reimbursements are excluded from the employee’s gross income under IRC Sections 105 and 106. The employer deducts the reimbursement as a business expense, and neither party pays FICA or FUTA taxes on the amount. This creates a double tax advantage that makes Section 105 plans appealing for businesses of all sizes.
| Step | What Happens |
|---|---|
| Employer creates written plan | Defines allowance amounts, eligible expenses, and plan terms |
| Employee buys individual insurance | Purchases coverage on marketplace or private exchange |
| Employee submits proof of premium | Provides receipt or explanation of benefits to employer |
| Employer reimburses tax-free | Pays employee up to the allowance cap, excluded from gross income |
The ACA Changed Everything: Why Standalone HRAs Were Banned
Before 2014, employers could use standalone HRAs under Section 105 to reimburse employees for individual health insurance premiums without restrictions. The Affordable Care Act changed that. The ACA introduced market reform provisions—including the prohibition on annual dollar limits for essential health benefits—that applied to all group health plans.
IRS Notice 2013-54 clarified that standalone HRAs are group health plans. Because a standalone HRA that reimburses individual premiums cannot satisfy the ACA’s annual limit prohibition on its own, the IRS ruled them non-compliant. An HRA could only comply if it was integrated with a group health plan that itself met the ACA’s requirements.
Employers could no longer reimburse individual premiums through a standalone HRA pre-tax. Employers who continued doing so faced excise tax penalties under IRC Section 4980D of $100 per day per affected employee. For a business with just 10 employees, that penalty could reach $365,000 per year.
| Before ACA (Pre-2014) | After ACA (2014–2016) |
|---|---|
| Standalone HRAs could reimburse individual premiums | Standalone HRAs reimbursing individual premiums were banned |
| No annual limit restrictions on HRAs | ACA annual limit prohibition applied to all HRAs |
| Minimal penalties for plan design errors | $100/day/employee excise tax for non-compliant plans |
| Employers had broad flexibility | Only integrated HRAs paired with group plans were allowed |
How Congress and the IRS Reopened Premium Reimbursement
The 21st Century Cures Act, signed into law in December 2016, created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This gave small employers with fewer than 50 full-time equivalent employees a compliant way to reimburse individual health insurance premiums under Section 105 starting in 2017.
In June 2019, the Departments of the Treasury, Labor, and Health and Human Services issued final rules creating the ICHRA—the Individual Coverage Health Reimbursement Arrangement. The ICHRA became available on January 1, 2020, and has no employer size restrictions and no annual contribution limits. It opened Section 105 premium reimbursement to employers of every size.
These two plan types—QSEHRA and ICHRA—are the primary compliant vehicles for reimbursing individual health insurance premiums under Section 105 today. Employers who want to reimburse premiums must use one of these approved structures or offer an integrated HRA paired with a group plan.
QSEHRA: The Small Employer’s Premium Reimbursement Tool
The QSEHRA is available only to businesses with fewer than 50 full-time equivalents that do not offer a group health plan. Employers set a fixed monthly allowance, and employees use it to get reimbursed for individual health insurance premiums and other qualifying medical expenses listed in IRS Publication 502.
2025 and 2026 QSEHRA Contribution Limits
The IRS sets annual contribution limits for the QSEHRA each year. For 2026, the IRS announced through Revenue Procedure 2025-32 the following maximums:
| Coverage Type | 2026 Annual Limit |
|---|---|
| Self-only | $6,450 ($537.50/month) |
| Family | $13,100 ($1,091.67/month) |
For comparison, the 2025 limits were $6,350 for self-only and $12,800 for family coverage. The increase reflects inflation adjustments using the chained Consumer Price Index.
| Coverage Type | 2025 Annual Limit |
|---|---|
| Self-only | $6,350 ($529.16/month) |
| Family | $12,800 ($1,066.66/month) |
QSEHRA Eligibility and Rules
The employer must offer the same allowance to all eligible full-time employees. The only permitted variation is family status—employers can offer one amount for self-only employees and a different amount for employees with families. Offering different amounts based on job title, tenure, or salary violates the QSEHRA’s uniform benefit requirement.
Employees must carry minimum essential coverage (MEC) to participate. An employee without MEC cannot receive tax-free reimbursements. Employees who receive premium tax credits on the ACA marketplace must reduce their credit by the amount of their QSEHRA allowance to avoid double-dipping on tax benefits.
QSEHRA Historical Limits at a Glance
| Year | Self-Only / Family Limit |
|---|---|
| 2026 | $6,450 / $13,100 |
| 2025 | $6,350 / $12,800 |
| 2024 | $6,150 / $12,450 |
| 2023 | $5,850 / $11,800 |
| 2022 | $5,450 / $11,050 |
ICHRA: No Caps, No Size Restrictions
The ICHRA has no employer size restrictions and no annual contribution cap. Employers can offer as much or as little as they want. A business with 5 employees and a business with 50,000 employees can both use an ICHRA.
ICHRA Employee Classes Add Flexibility
Unlike the QSEHRA, the ICHRA allows employers to vary allowances by employee class. The IRS defines 11 permissible employee classes, including full-time, part-time, salaried, hourly, seasonal, temporary, and geographic-based classes. This gives employers enormous flexibility in designing benefits that fit different employee groups.
An employer could offer full-time employees $500 per month and part-time employees $200 per month—and both amounts would be compliant. The key rule is that all employees within the same class must receive the same allowance.
ICHRA and Premium Tax Credits
Employees must have individual health insurance or Medicare to participate in an ICHRA. Employees who find the ICHRA allowance “unaffordable” under IRS rules can opt out and claim premium tax credits instead. But employees cannot use both the ICHRA and premium tax credits at the same time—they must choose one or the other.
The IRS issued final rules in 2025 that confirmed ICHRAs qualify as minimum essential coverage (MEC). This means applicable large employers (ALEs) that offer an ICHRA to at least 95% of full-time employees satisfy their ACA employer mandate obligation and avoid Section 4980H penalties.
QSEHRA vs. ICHRA: Which One Fits Your Business?
Choosing between the QSEHRA and ICHRA depends on your business size, budget, and benefit goals. Both reimburse individual health insurance premiums tax-free under Section 105, but they differ in important ways.
| Feature | QSEHRA |
|---|---|
| Employer size | Fewer than 50 FTE employees only |
| Contribution limits | $6,450 self / $13,100 family (2026) |
| Can vary by class? | No—uniform benefit required |
| Group plan allowed? | No—cannot be paired with a group plan |
| Premium tax credit | Reduced by QSEHRA allowance amount |
| Feature | ICHRA |
|---|---|
| Employer size | No size restrictions |
| Contribution limits | No cap—employer decides |
| Can vary by class? | Yes—11 employee classes permitted |
| Group plan allowed? | Yes—can coexist, but not for same class |
| Premium tax credit | Must opt out of ICHRA to claim credits |
A small bakery with 8 employees that wants a simple, uniform benefit should consider the QSEHRA. A mid-size tech company with 200 employees across multiple states that wants to offer different amounts to salaried vs. hourly workers should consider the ICHRA.
Integrated HRA and Excepted Benefit HRA: The Other Options
Integrated HRA (GCHRA): Pairs with Group Insurance
An integrated HRA—also called a Group Coverage HRA—works alongside a traditional group health insurance plan. The employer offers group coverage and adds an HRA to reimburse out-of-pocket costs like deductibles, copays, and coinsurance. This type of HRA cannot reimburse individual premiums.
There are no contribution limits for an integrated HRA, and the employer decides how much to offer. This makes it a useful supplement for businesses that already provide group insurance but want to help employees manage their remaining costs.
Excepted Benefit HRA (EBHRA)
The Excepted Benefit HRA allows employers to reimburse employees for limited benefits—like dental, vision, and short-term limited duration insurance premiums. It can be offered alongside a group health plan, and employees do not need to be enrolled in the group plan to participate. The annual limit for 2026 is $2,150, and the EBHRA cannot reimburse individual major medical premiums.
Which Insurance Premiums Can Section 105 Plans Reimburse?
Section 105 plans can reimburse a wide range of insurance premiums, as long as the premiums were not paid with pre-tax dollars. The key rule: you cannot double-dip. If you already paid a premium with pre-tax salary deductions, you cannot also get a tax-free reimbursement for that same premium.
Eligible premiums include:
- Individual health insurance (on-exchange and off-exchange)
- Medicare Part A, Part B, and supplement plans
- Dental insurance
- Vision insurance
- COBRA premiums
- Long-term care insurance
- TRICARE
- Medicaid and CHIP
- Short-term medical insurance
- Prescription drug insurance
Premiums that are not eligible:
- Premiums already paid with pre-tax dollars through a cafeteria plan
- Premiums for plans that do not qualify as MEC (under QSEHRA and ICHRA)
| Eligible Premiums | Not Eligible |
|---|---|
| Individual health insurance (on/off exchange) | Premiums paid with pre-tax dollars |
| Medicare Part A, B, and supplements | Non-MEC plans (for QSEHRA/ICHRA) |
| Dental, vision, COBRA, long-term care | Life insurance premiums |
| TRICARE, Medicaid/CHIP, prescription plans | Disability insurance premiums |
How Business Entity Type Affects Section 105 Eligibility
Not every business owner benefits equally from a Section 105 plan. The tax advantages depend on how your business is structured. Federal rules treat each entity type differently, and getting this wrong can mean losing the tax deduction entirely.
C-Corporations
C-corporation owner-employees receive the full benefit of Section 105. The corporation can reimburse the owner-employee’s health insurance premiums tax-free, and the corporation deducts those reimbursements as a business expense. The owner does not need to hire a spouse—the corporate structure alone qualifies them as an employee.
Sole Proprietorships
A sole proprietor cannot participate in a Section 105 plan as both the employer and the employee. The IRS does not recognize a sole proprietor as their own employee. The workaround: if the sole proprietor employs their spouse as a bona fide employee, the spouse can receive Section 105 benefits that cover the spouse, the business owner, and their dependents.
The IRS scrutinizes spousal employment closely. The spouse must perform real work for the business, receive reasonable compensation, and be treated like any other employee. Fabricated employment relationships are a red flag for audits.
S-Corporations
S-corporations can establish Section 105 plans for their employees. However, more-than-2% shareholders face special rules under Revenue Ruling 91-26. Health insurance premiums paid or reimbursed for a 2%+ shareholder must be reported as wages on the shareholder’s W-2. The shareholder can then deduct those premiums on their personal return using the self-employed health insurance deduction on Form 1040.
This means 2%+ S-corp shareholders do not receive the same tax-free reimbursement that regular employees get. The premiums avoid FICA taxes but are included in gross income. Non-shareholder employees of the S-corp, however, receive the full tax-free benefit.
Partnerships and LLCs
Partners in a partnership are not considered employees under the tax code. A partner cannot directly participate in a Section 105 plan. Like sole proprietors, the workaround involves spousal employment—the partner’s spouse must be a bona fide employee of the partnership. A partnership between spouses does not qualify.
LLCs follow the rules of whatever entity they elect for tax filing purposes. An LLC taxed as a sole proprietorship follows sole proprietor rules. An LLC taxed as a C-corporation follows C-corp rules. The filing election determines everything.
| Business Type | Owner Eligibility for Tax-Free Reimbursement |
|---|---|
| C-Corporation | Owner-employee receives full tax-free benefits |
| Sole Proprietorship | Owner cannot participate directly; must employ spouse |
| S-Corporation (2%+ shareholder) | Premiums reported as wages on W-2; not tax-free |
| Partnership | Partners cannot participate; must employ spouse |
| LLC | Follows rules of elected tax filing status |
Section 105(h) Nondiscrimination Rules: Who You Cannot Favor
IRC Section 105(h) contains nondiscrimination rules for self-insured plans that prevent employers from designing benefits that favor highly compensated individuals (HCIs). Because HRAs are self-insured group health plans, these rules apply directly to Section 105 premium reimbursement arrangements.
Who Counts as a Highly Compensated Individual?
The IRS defines HCIs as employees who own more than 5% of the company or earn above a certain threshold ($155,000 in 2024). The top 25% of employees ranked by pay also fall into this category. Plans that give these individuals bigger allowances, faster eligibility, or better benefits can fail nondiscrimination testing.
What Happens If Your Plan Fails Testing?
If a Section 105 plan fails the nondiscrimination test, the consequences fall on the highly compensated individuals—not the rank-and-file employees. Any “excess reimbursements” paid to HCIs become taxable income for those individuals. The employer may also face back taxes and penalties on the entire plan.
The IRS can assess excise taxes of $100 per day per individual discriminated against if the plan violates ACA market reform rules. For ICHRAs, the 2025 final rule confirmed that Section 105(h) applies, and employers must design their employee classes carefully to avoid triggering these penalties.
| Nondiscrimination Violation | Consequence |
|---|---|
| Plan favors HCIs in eligibility | Excess reimbursements taxed as income to HCIs |
| Plan favors HCIs in benefits | Back taxes, potential penalties on entire plan |
| ACA market reform violation | $100/day/individual excise tax |
| Failure to correct within 30 days | Self-reporting on IRS Form 8928 required |
Three Real-World Scenarios: Section 105 Premium Reimbursement in Action
Scenario 1: Small Bakery Owner Sets Up a QSEHRA
Maria owns a bakery with 12 full-time employees. She cannot afford a group health insurance plan, but she wants to help her team pay for coverage. Maria sets up a QSEHRA with a monthly allowance of $450 for self-only employees and $900 for employees with families.
Each employee buys their own individual plan on the ACA marketplace. They submit their monthly premium receipts to Maria’s third-party administrator. The administrator verifies the expense and reimburses each employee tax-free.
| Maria’s Decision | Result |
|---|---|
| Sets up QSEHRA with written plan document | Tax-free reimbursements are legally valid |
| Offers $450/month self-only, $900/month family | Within 2026 IRS limits ($537.50 / $1,091.67) |
| Requires employees to show proof of MEC | Meets QSEHRA participation requirement |
| Deducts all reimbursements as business expenses | Reduces bakery’s taxable income |
| Does not offer a group health plan | Required—QSEHRA cannot coexist with group coverage |
Maria’s total annual cost for 12 employees is predictable and fixed. She avoids annual rate hikes, and her employees choose the plans that work best for their personal needs.
Scenario 2: Tech Company Switches from Group Plan to ICHRA
David runs a tech company with 85 employees spread across Texas, California, and New York. His group health insurance premiums have increased 12% each year for the past three years. He decides to drop the group plan and switch to an ICHRA.
David sets up three employee classes based on geography. Employees in California receive $700/month because premiums are higher there. Employees in Texas receive $500/month, and employees in New York receive $650/month. All employees within each geographic class receive the same allowance.
| David’s Decision | Result |
|---|---|
| Drops group health plan entirely | Eliminates unpredictable annual premium hikes |
| Creates ICHRA with geographic classes | Compliant under IRS 11 permissible employee classes |
| Varies allowance by location | Addresses cost-of-living differences legally |
| Requires employees to carry individual insurance | Meets ICHRA participation requirement |
| Reports ICHRA as MEC on Section 6055 filings | Satisfies ACA employer mandate for ALEs |
David’s employees can now choose their own doctors, networks, and plan types. His total benefits budget is fixed at the exact amount he sets for each class.
Scenario 3: Sole Proprietor Uses Spousal Employment Strategy
Tom is a self-employed consultant operating as a sole proprietorship. He wants to deduct 100% of his family’s health insurance premiums, dental bills, and out-of-pocket medical expenses. Tom’s wife, Sarah, helps him manage invoices, schedule clients, and handle bookkeeping.
Tom formally employs Sarah with a written employment agreement, pays her a reasonable wage, and withholds payroll taxes. He then sets up a Section 105 HRA that reimburses Sarah—and by extension, her spouse (Tom) and their dependents—for all qualifying medical expenses including health insurance premiums.
| Tom’s Decision | Result |
|---|---|
| Employs Sarah as a bona fide employee | IRS recognizes her as eligible for Section 105 benefits |
| Pays reasonable wages and withholds taxes | Avoids IRS challenge of fabricated employment |
| Creates written Section 105 plan document | Tax-free reimbursement is legally protected |
| Reimburses family premiums and medical costs | 100% deductible as business expense—federal, state, and FICA |
| Keeps receipts and documentation for 10 years | Meets IRS substantiation requirements |
Tom saves thousands per year compared to taking the standard self-employed health insurance deduction alone, because the Section 105 plan also covers out-of-pocket costs and avoids FICA taxes.
Compliance Rules Every Employer Must Follow
Section 105 plans are group health plans under federal law. This means they must satisfy requirements from multiple agencies. Ignoring any of these can trigger penalties ranging from a few hundred dollars to hundreds of thousands.
IRS Requirements
The IRS requires a written plan document that defines eligible expenses, contribution amounts, and plan terms. Employees must submit proper documentation verifying each expense, and the employer must keep that documentation on file for 10 years. The plan must also pass Section 105(h) nondiscrimination testing if it is self-insured.
ERISA Requirements
Section 105 plans are employee welfare plans under ERISA. Employers must create a Summary Plan Description (SPD) and give a copy to each participant. The federal government also requires that employers not endorse specific individual health insurance policies or pay insurers directly—doing so can trigger ERISA plan status for the underlying individual policies.
ACA Requirements
The ACA requires Section 105 plans to cover preventive care without cost-sharing, provide dependent coverage for adult children up to age 26, and comply with the annual PCORI fee filed on Form 720. Employers must also give 60 days’ advance notice before making material changes to the plan.
COBRA and HIPAA
COBRA rules apply to employers with 20 or more employees. Terminated employees must be offered the option to continue participating in the Section 105 plan, and the employer can charge up to 102% of the allowance value. HIPAA privacy rules also apply because administering the plan involves handling protected health information (PHI).
Mistakes to Avoid with Section 105 Premium Reimbursement
Getting a Section 105 plan wrong is expensive. These are the most common errors employers make—and the specific negative outcome of each.
1. Reimbursing premiums without a written plan document. The IRS requires formal written documentation. Without it, all reimbursements become taxable income to employees, and the employer loses the business deduction.
2. Using a standalone HRA to reimburse individual premiums. This violates IRS Notice 2013-54 and triggers the $100/day/employee excise tax under IRC Section 4980D. Only QSEHRAs, ICHRAs, or integrated HRAs paired with group plans are compliant.
3. Offering different QSEHRA amounts to different employees based on job title or salary. The QSEHRA requires uniform benefits. The only permitted variation is family status. Violating this rule makes the entire arrangement non-qualified, and all reimbursements become taxable.
4. Failing to verify minimum essential coverage. Both QSEHRAs and ICHRAs require employees to carry MEC. Reimbursing an employee who lacks MEC creates a non-compliant distribution that may be taxable.
5. Allowing a 2%+ S-corp shareholder to receive tax-free reimbursements. Under Revenue Ruling 91-26, these shareholders must include premiums as wages on their W-2. Treating these reimbursements as tax-free triggers payroll tax deficiencies and IRS scrutiny.
6. Failing to coordinate with premium tax credits. QSEHRA participants must reduce their marketplace subsidy by their allowance. ICHRA participants must choose between the ICHRA and the subsidy. Employees who collect both face tax repayment at filing time.
7. Not filing PCORI fees or providing required notices. The ACA requires annual PCORI fees on Form 720, 60-day advance notice of material modifications, and proper reporting on Forms 1095. Missing these deadlines results in fines of $330 or more per return.
Do’s and Don’ts of Section 105 Premium Reimbursement
| Do | Why |
|---|---|
| Create a formal written plan document | IRS requires it; without it, all reimbursements are taxable |
| Use a QSEHRA or ICHRA for individual premium reimbursement | These are the only compliant standalone options post-ACA |
| Require employees to prove MEC before reimbursing | Prevents non-compliant tax-free distributions |
| Keep expense documentation for 10 years | IRS audit window extends this long for benefit plans |
| File PCORI fees annually on Form 720 | Avoids ACA penalties for plan sponsors |
| Provide 60-day advance notice of plan changes | Required by ACA for material modifications |
| Offer COBRA continuation to employees at qualifying employers | Avoids DOL penalties for employers with 20+ employees |
| Don’t | Why |
|---|---|
| Don’t use a standalone HRA to reimburse individual premiums | Violates IRS Notice 2013-54; triggers $100/day/employee penalty |
| Don’t offer different QSEHRA amounts by job title | QSEHRA requires uniform benefits; only family status varies |
| Don’t let 2%+ S-corp shareholders receive tax-free reimbursements | Must be reported as W-2 wages under Rev. Ruling 91-26 |
| Don’t skip nondiscrimination testing for self-insured plans | Excess reimbursements to HCIs become taxable |
| Don’t reimburse premiums already paid with pre-tax dollars | Double-dipping violates IRS rules |
| Don’t pay insurance companies directly on behalf of employees | Triggers ERISA plan status for underlying policies |
| Don’t fabricate spousal employment for sole proprietor plans | IRS scrutinizes these arrangements; penalties for fraud |
Pros and Cons of Using Section 105 to Reimburse Premiums
| Pros | Cons |
|---|---|
| Tax-free for employees: Reimbursements excluded from gross income, FICA, and FUTA | Compliance burden: Must follow IRS, ERISA, ACA, HIPAA, and COBRA rules |
| Tax-deductible for employers: Full business deduction reduces taxable income | Unfamiliar to employees: Workers may not understand how reimbursement plans work |
| Predictable costs: Employer sets fixed allowances with no annual rate hikes | Contribution limits on QSEHRAs: Capped at $6,450/$13,100 in 2026 |
| Employee choice: Workers pick their own doctors, networks, and plan types | Owner restrictions: S-corp 2%+ shareholders and sole proprietors face limitations |
| Flexibility: ICHRAs allow 11 employee classes with no contribution caps | No employer-paid claims: Unlike group insurance, employees handle their own claims |
| Unused funds stay with employer: No wasted premium dollars on unused benefits | MEC requirement: Employees without qualifying coverage cannot participate |
State-Level Considerations for Section 105 Plans
Section 105 is a federal tax code provision, and most of the rules discussed above come from federal law. However, state tax laws can affect how reimbursements are treated for state income tax purposes. Most states follow the federal treatment and exclude Section 105 reimbursements from state income tax, but a few states have unique rules.
Employers operating in multiple states should also consider that individual health insurance premiums vary dramatically by location. This is one reason the ICHRA’s geographic employee class option is so valuable—it allows employers to match allowances to the actual cost of coverage in each state or rating area.
State insurance regulations may also affect which individual health plans are available to employees. Some states have their own health insurance exchanges with different plan options than the federal marketplace. Employers should work with a benefits advisor familiar with the states where their employees live and work.
Key Federal Entities and Their Roles
Understanding who enforces the rules helps employers stay compliant. Multiple federal agencies oversee different aspects of Section 105 plans.
| Agency | Role |
|---|---|
| IRS | Enforces tax rules under IRC Sections 105, 106, 4980D, and 105(h); sets QSEHRA limits |
| Department of Labor (DOL) | Enforces ERISA requirements including SPDs and fiduciary duties |
| HHS (Dept. of Health and Human Services) | Enforces ACA market reform provisions and preventive care mandates |
| CMS (Centers for Medicare & Medicaid Services) | Oversees marketplace enrollment and premium tax credit coordination |
Relevant Court Rulings and IRS Guidance
Several IRS rulings and legal precedents shape how Section 105 premium reimbursement works today.
Revenue Ruling 71-588 established the foundation for employers reimbursing employees’ medical expenses through accident and health plans under Section 105. This ruling supports the spousal employment strategy used by sole proprietors and partnerships.
IRS Letter Ruling 9409006 reinforced that a self-employed individual can employ a spouse and offer a medical benefits package through a Section 105 plan. The benefits cover the employee-spouse, the business owner, and all dependents.
IRS Notice 2013-54 was the watershed ruling that banned standalone HRAs from reimbursing individual health insurance premiums after the ACA took effect. This notice clarified that HRAs are group health plans subject to ACA market reforms.
Revenue Ruling 91-26 and Announcement 92-16 established the special rules for 2%+ S-corporation shareholders. Premiums paid or reimbursed by the S-corp for these shareholders must be included in W-2 wages.
Revenue Ruling 2002-41 introduced the carry-over provision, allowing unused Section 105 HRA funds to roll over to future plan years at the employer’s discretion.
2019 Final Rules (84 FR 28888) created the ICHRA and Excepted Benefit HRA, providing new compliant pathways for premium reimbursement starting January 1, 2020.
2025 Final Rule on ICHRA confirmed that ICHRAs qualify as MEC, clarified Section 4980H obligations for ALEs, and detailed Section 105(h) nondiscrimination rules for ICHRAs specifically.
Setting Up Your Section 105 Plan: Every Step and Decision
Step 1: Choose Your Plan Type
Decide whether a QSEHRA, ICHRA, integrated HRA, or EBHRA fits your business. If you have fewer than 50 employees and no group plan, the QSEHRA is the simplest option. If you need more flexibility or have more than 50 employees, the ICHRA is the better choice.
Step 2: Draft the Written Plan Document
The plan document must include the effective date, eligible employees, covered expenses, monthly or annual allowance amounts, and the plan’s termination provisions. Many employers use a third-party administrator or benefits software to generate compliant plan documents.
Step 3: Set Allowance Amounts
For QSEHRAs, the allowance must be the same for all eligible employees (varied only by family status) and cannot exceed the IRS annual limits. For ICHRAs, the employer has complete freedom to set amounts—but all employees within the same class must receive equal treatment.
Step 4: Notify Employees
QSEHRA employers must provide written notice to eligible employees at least 90 days before the start of the plan year. The notice must include the allowance amount, the requirement for MEC, and how the QSEHRA may affect premium tax credits. ICHRA employers must also provide notice at least 90 days in advance.
Step 5: Collect Proof of Coverage and Expenses
Employees must show they have minimum essential coverage before receiving reimbursements. They then submit premium receipts or other documentation for each expense. The employer or administrator reviews and verifies each claim before issuing reimbursement.
Step 6: Reimburse and Document
The employer reimburses verified expenses tax-free. All documentation—plan documents, employee notices, expense receipts, and reimbursement records—must be kept on file for at least 10 years. Employers must also file the annual PCORI fee on Form 720 and handle any applicable COBRA, ERISA, and ACA reporting.
FAQs
Can a Section 105 plan reimburse health insurance premiums?
Yes. Section 105 plans like QSEHRAs and ICHRAs reimburse individual health insurance premiums tax-free, as long as the plan is properly structured and the employee has minimum essential coverage.
Is a Section 105 plan the same as health insurance?
No. A Section 105 plan is a reimbursement arrangement, not an insurance policy. It reimburses employees for premiums and medical costs but does not provide coverage itself.
Can a sole proprietor use a Section 105 plan?
Yes, but not directly. A sole proprietor must employ a spouse as a bona fide employee. The spouse receives benefits covering the entire family, including the business owner.
Can S-corp shareholders get tax-free Section 105 reimbursements?
No. More-than-2% S-corp shareholders must include reimbursed premiums as W-2 wages. They can deduct premiums on their personal return but cannot receive tax-free reimbursement.
Do employees need health insurance to use a QSEHRA?
Yes. Employees must carry minimum essential coverage to receive tax-free QSEHRA reimbursements. Without MEC, reimbursements become taxable income.
Can I offer a QSEHRA and a group health plan at the same time?
No. The QSEHRA is only available to employers that do not offer a group health plan to any employee.
What is the QSEHRA limit for 2026?
Yes, there is a limit. The 2026 QSEHRA maximum is $6,450 for self-only employees and $13,100 for employees with families, as set by the IRS.
Does the ICHRA have a contribution limit?
No. The ICHRA has no annual contribution cap. Employers decide how much to offer each employee class.
Can I use both an ICHRA and premium tax credits?
No. Employees must choose between the ICHRA and premium tax credits. They cannot collect both at the same time for the same coverage.
What happens if my Section 105 plan fails nondiscrimination testing?
Yes, there are consequences. Excess reimbursements paid to highly compensated individuals become taxable, and the employer may face $100/day per individual penalties.
Can a Section 105 plan reimburse Medicare premiums?
Yes. QSEHRAs and ICHRAs can reimburse Medicare Part A, Part B, and Medicare supplement premiums tax-free.
Are Section 105 reimbursements subject to payroll taxes?
No. Properly structured Section 105 reimbursements are excluded from FICA and FUTA taxes for both the employer and the employee.
What is the penalty for a non-compliant standalone HRA?
Yes, the penalty is severe. Employers face an excise tax of $100 per day per affected employee under IRC Section 4980D—up to $36,500 per employee per year.
Can a C-corp owner participate in a Section 105 plan?
Yes. C-corp owner-employees receive full tax-free reimbursements and a business deduction, making C-corps the most favorable entity type for Section 105 plans.
Do I need a third-party administrator for a Section 105 plan?
No, it is not legally required. However, using one helps ensure compliance with IRS documentation, ERISA, HIPAA privacy, and ACA reporting obligations.
Related reading
- What Disqualifies You From the Premium Tax Credit? + FAQs
- Can an Employer Reimburse an Employee for Health Insurance? (w/Examples) + FAQs
- Can QSEHRA Reimburse Insurance Premiums? (w/Examples) + FAQs
- Is Section 105 Reimbursement Taxable Income? (w/Examples) + FAQs
- Can I Deduct Section 105 Reimbursements? (w/Examples) + FAQs
- Can Section 105 Reimburse Long-Term Care Insurance? (w/Examples) + FAQs