Understanding HRA – 105 (Section 105 Plans)
Tax-advantaged benefit plans that allow employers to reimburse employees for qualified medical expenses tax-free
An HRA 105, often called a Section 105 Health Reimbursement Arrangement, is a tax-advantaged benefit plan created under Section 105 of the Internal Revenue Code.
It allows employers to reimburse employees for qualified medical expenses tax-free, while deducting those reimbursements as a business expense.
In short: the employer pays, the employee gets reimbursed tax-free — everyone wins when it's structured correctly.
Key IRS Code Reference
26 U.S. Code § 105 – Amounts received under accident and health plans
Official IRS Code LinkUnder § 105(b), amounts paid to reimburse an employee (or spouse/dependents) for medical care expenses are excluded from gross income if they meet plan requirements.
- 1
Employer establishes a written plan defining eligible participants and reimbursement rules.
- 2
Employer funds reimbursements directly (no employee salary reduction).
- 3
Employee submits proof of qualified medical expenses.
- 4
Employer reimburses those expenses tax-free.
All reimbursements must follow IRS definitions of medical care under § 213(d).
| Requirement | What It Means | Why It Matters |
|---|---|---|
| Written plan | Must clearly state who qualifies, limits, and what's covered | Without it, reimbursements can become taxable income |
| Medical expenses only | Must meet § 213(d) definition | Prevents disqualification |
| Employer-funded only | No salary-reduction or cafeteria-plan funding | Maintains tax-free status |
| Non-discriminatory | Can't favor highly compensated employees | Required under § 105(h) |
| Proper documentation | Proof of expense required | Keeps IRS happy |
Classic HRA (Integrated HRA)
Works with a group health plan to cover deductibles and copays.
Individual Coverage HRA (ICHRA)
Reimburses individual health insurance premiums + out-of-pocket expenses.
Qualified Small Employer HRA (QSEHRA)
For small businesses (< 50 FTEs) that don't offer group health.
Excepted-Benefit HRA (EBHRA)
Reimburses vision, dental, or short-term coverage.
Employer reimbursements are 100% tax-deductible
Employee reimbursements are excluded from income & payroll taxes
Works even for small businesses and sole proprietors (with proper setup)
Many small business owners use a spousal employee plan:
- 1
Hire your spouse as an employee.
- 2
Establish a written § 105 plan.
- 3
Reimburse the spouse for family medical expenses (including your own).
- 4
Deduct those reimbursements as a business expense.
This turns family medical costs into deductible expenses — but you must document the employment relationship, hours, and reimbursements.
Reimbursing non-qualified items
Giving employees cash or non-medical benefits
Ignoring nondiscrimination rules
Failing to substantiate expenses with receipts
Forgetting that self-employed owners (without spouse employees) generally can't participate directly
- IRS Revenue Ruling 2002-41 – Clarifies employer-reimbursement rules
- IRS Notice 2013-54 – Coordination of HRAs with ACA
- Final HRA Rules (2019) – Allows ICHRAs and EBHRAs
- IRS HRA Overview
- Section 105(h) Nondiscrimination Rules
"A properly structured HRA 105 lets small-business owners reimburse employees for medical expenses completely tax-free while deducting those costs from the business."
Disclaimer: This content is for informational purposes only and should not be considered tax or legal advice. Always consult your CPA or benefits attorney before implementing a Section 105 plan.
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