Why are Walgreens, IBM, Time Warner, McDonalds, and Sears moving to "Defined Contribution" to fund employees' and personal health coverage?

ANSWER: It saves the company money and provides the employee more options and savings.

The Affordable Care Act has opened the door to many new opportunities. Because of the new changes in Healthcare, Health Reimbursment Plans (HRPs) are the perfect fit for small businesses who want to provide health benefits to their employees.


(The information on this site is intended for informational purposes only and does not constitute legal advice. To comply with IRS rules, we must inform you that if this site contains advice relating to federal taxes, it was not intended nor written to be, and cannot be, used for the purpose of avoiding penalties that may be imposed under federal tax law. Under these rules, a taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is reflected in a comprehensive tax opinion that conforms to stringent requirements under federal law.)

Section 105 Health Reimbursement Plans (HRPs)


 Section 105 of the IRS code allows small business owners to setup Health Reimbursement Plans (HRPs) to pay for health insurance premiums tax-free. These can be premiums incurred by the employee or his or her dependents, but they must be allowed under a defined plan document. The documents are created with the Select Pointe team working with the employer to outline the expenses eligible for reimbursement.


Section 105 health reimbursement plans are Health Reimbursement Arrangements (HRAs), but not all HRPs are HRAs. HRAs have specific requirements outlined in Notice 2002-45. If the HRP is not structured to have a plan-wide maximum benefit and rollover, it is not an HRA.


Advantages of Section 105 Health Reimbursement Plans


Section 105 health reimbursement plans offer several advantages to both the employer and the employees. The employees are given greater control over the health plan they choose, and the money used to reimburse them is not considered taxable income. Hence, employees can save 20-40% on health insurance when compared to paying with post-tax dollars, depending on how much he or she pays in taxes. 


In the same vein, employers deduct reimbursements as a business expense and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%). Employers have enormous flexibility and control with 105 health reimbursement with regard to establishing maximum reimbursement amounts and setting eligibility requirements via the plan document.


How to set up a Section 105 Health Reimbursement Plan


Section 105 health reimbursement plans are actually quite simple in practice:


  1. The employer must establish a formal written Section 105 health reimbursement plan (See plan document requirements).
  2. The employer determines the amounts available to each employee for reimbursements during a period of coverage (generally a year). 
  3. As eligible expenses are submitted, the employer reimburses the employees (100% tax-free) up to the available amounts. 
  4. Employers determine each year whether none, some or all unused funds carry over to the next year


Administering a Section 105 Health Reimbursement Plan


Can a business self-administer a Section 105 health reimbursement plan? The short answer is yes, but it is virtually impossible for a business to stay in compliance without proper administration software. It is very inexpensive -(depending on the number of employees) between $500-$1,000. A primary reason for using compliant Section 105 administration software is that many employers will otherwise overlook important compliance obligations that put them at risk financially. Failure to comply with the following requirements can cost an employer thousands of dollars per day in fines: Do you have questions?


  1. HIPAA Privacy
  2. IRS Rules
  3. ERISA Rules
  4. Medicare Reporting
  5. Legal Plan Documents
  6. COBRA (if applicable)
  7. New Affordable Care Act (ACA) Requirements


There are many additional benefits of using an administrator versus self-administration, such as online claim submission and processing, integrated plan documents, and different allowances by class of employee.


If you are interested in suggestions for setting up an HRP plan email or call or 615-504-1422


HRP Plan Document Requirements

An HRP is a Health Reimbursement Plan that allows tax-free reimbursement of medical and insurance expenses. The HRP Plan Document describes the HRP's terms and conditions related to the operation and administration of the HRP.                            

HRP Documents must comply with IRS and ERISA rules

Since an HRP is subject to ERISA (Employee Retirement Income Security Act), a legal HRP document must be provided in writing. A Summary of Benefits is not considered an HRP Plan Document or HRP Summary Description (SPD). If an HRP exists without a written HRP Document—it is out of compliance.

An HRP Plan Document should contain the following: 

    • Name of the HRP Plan Document Administrator
    • Designation of any Named Fiduciaries other than the HRP Administrator under the claims procedure for deciding benefit appeal.
    • A description of the HRP benefits provided
    • The standard of review for HRP benefit decisions
    • Eligibility criteria (e.g., classes of employees, waiting period for new hires, and hours worked per week)
    • The effective date of participation (e.g., next day or first of month following satisfaction of the HRP Plan Document eligibility waiting period)
    • Amount the HRP Participant must pay towards the cost of HRP coverage (typically $0)
    • HRP Sponsor's amendment and termination rights and procedures, and what happens to HRP assets, if any, in the event of HRP termination
    • Rules restricting and regulating the use of Protected Health Information (PHI), if Plan Sponsor uses PHI
    • Coordination of Benefits provisions
    • Procedures for allocating and designating administrative duties to an HRP TPA or committee
    • How the HRP is funded
    • Information regarding COBRA, HIPAA, and other federal mandates  


To learn more about HRPs click here.

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