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    Section 105 Medical Reimbursement Plans: A 2026 Guide for Small Business Owners

    A Section 105 plan is a written, employer-funded arrangement that lets a business reimburse employees for medical expenses and, in some setups, health insurance premiums. The reimbursements are deductible for the business and, when the plan follows the rules, are not taxable income to the employee. The name comes from Section 105 of the Internal Revenue Code, which excludes these employer reimbursements from an employee's income.

    Most owners who search for a "105 plan" are really asking one of three questions: can my business pay for health coverage tax-free, can I include myself, and which version of the plan fits my company. This page answers all three.

    How a Section 105 plan works

    1. 1. The business adopts a written plan document. It names who is eligible, what is covered, and how claims are reimbursed. A plan that exists only as a habit is not a plan.
    2. 2. Only the employer funds it. Reimbursements cannot come out of employee paychecks.
    3. 3. Employees submit proof of expenses. Receipts or statements are substantiated before money is paid.
    4. 4. The business reimburses qualified expenses: medical care as defined in IRC Section 213(d), which can include premiums for some coverage, deductibles, copays, prescriptions, dental and vision costs.
    5. 5. The business deducts the reimbursements, and the employee generally owes no income or payroll tax on them.

    Who can participate, including owners

    Whether an owner can benefit depends on how the business is organized:

    Business typeCan the owner participate directly?Common path
    C corporationYes, owner-employees are employeesOwner can be covered by the plan
    Sole proprietorNoHire your spouse as a genuine W-2 employee; the plan covers the employee's family, which includes you
    Partnership / multi-member LLCNoSame spouse-employee path, if the spouse is not a partner
    S corporation (more than 2% shareholder)NoPremiums can be paid by the S corp and reported as wages, then deducted on the owner's return

    Self-employed people are not treated as employees under Section 105(g), which is why a sole proprietor can't reimburse themselves directly.

    The spouse-employee plan

    The spouse-employee version is the one most small family businesses use. The owner hires their spouse to do real work, at reasonable pay, documented like any other employee. The business adopts a Section 105 plan covering that one employee and their family. Because the spouse's family includes the owner and children, the plan can reimburse the whole household's qualified medical costs.

    What makes or breaks it:

    • the spouse does real, documented work for the business;
    • the plan is in writing before expenses are reimbursed;
    • the spouse is the only eligible employee; adding a second employee changes the rules (see below);
    • every reimbursement has a receipt.

    The rule that catches owners: reimbursing individual premiums for staff

    Once a business has two or more eligible employees, a plan that pays or reimburses employees' individual health insurance premiums is treated as a group health plan. Under IRS Notice 2013-54, an arrangement like that generally fails federal group-plan rules unless it is set up as one of the approved designs, and the penalty can be $100 per day for each affected employee.

    That is why multi-employee businesses usually use a QSEHRA or ICHRA instead of a homemade premium-reimbursement plan.

    Section 105 plan vs. QSEHRA vs. ICHRA (2026)

    Spouse-only Section 105 planQSEHRAICHRA
    Who it fitsFamily business, spouse is the only employeeEmployers under 50 full-time employees with no group planEmployers of any size
    2026 dollar limitNo set IRS cap$6,450 self-only / $13,100 familyNo IRS cap
    Coverage employees needNone specificQualifying individual coverageQualifying individual coverage
    Owner participationThrough the spouse-employeeNot for sole proprietors, partners or more-than-2% S-corp ownersSame as QSEHRA

    QSEHRA limits for 2026 come from IRS Revenue Procedure 2025-32.

    Common mistakes

    • reimbursing without a written plan;
    • paying a spouse who doesn't do real work;
    • reimbursing non-medical expenses or paying cash allowances with no receipts;
    • adding employees and keeping a premium-reimbursement setup that no longer qualifies;
    • assuming every insurance plan can be reimbursed through every kind of HRA; the coverage requirements differ.

    Frequently asked questions

    An HRA (health reimbursement arrangement) is a type of Section 105 plan. People use "105 plan," "105 HRA" and "medical reimbursement plan" for the same family of arrangements.

    No. A self-employed owner is not an employee for Section 105 purposes. The usual route is employing a spouse who works in the business.

    Not required by law, but the plan must be documented and run consistently. Many owners use an administrator to keep records clean.

    Reimbursements of qualified medical expenses under a properly run plan are generally not taxable to the employee and are deductible to the business. See our guide: Is Health Insurance Reimbursement Taxable?

    Talk it through with Jay

    A Section 105 plan solves the tax side. You still need the right coverage underneath it. Jay Reagan can walk you through health coverage options for you, your family, or your team, and coordinate with your CPA on the plan setup.

    This page is general information, not tax or legal advice. ProHealth Insurance Solutions is a licensed insurance agency, not a tax advisor or law firm. Confirm your plan design with a CPA or benefits attorney.