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?
The short 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.
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 plan. A plan discriminates as to eligibility unless it benefits:
1) 70% or more of all employees, or 2) 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 3) A group of employees described in IRC Section 410(b)(2)(A)(I) that is found to be a nondiscriminatory classification in accordance with Prop. Treas. Reg. 1.410(b)- For these purposes, there may be excluded from consideration any employees who have not completed three years of service, part-time employees whose customary weekly employment is less than 35 hours, employees covered by a collective bargaining agreement, and nonresident aliens.
Who are highly compensated employees?
A highly compensated employee meets one of these tests:
1. Is one of the five highest-paid officers of the employer
2. Is a shareholder who owns directly or indirectly more than 10% in value of the employer's stock
3. Is in the top 25% of highest paid employees
What happens if the plan is discriminatory?
If the 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.