Basically, a Section 105 plan allows businesses to reimburse an employee for medical and insurance expenses incurred by the employee or his or her dependents. Section 105 plans are also frequently found in the form of Health Reimbursement Arrangements (HRAs). A businesses might also implement a Section 105 plan alongside a conventional employer-sponsored health insurance plan (to reimburse amounts not covered by insurance) or as a stand-alone medical reimbursement plan (to reimburse amounts for out-of-pocket health insurance premiums). All reimbursements are 100% tax deductible by the businesses and its employees. When designing a Section 105 plan, the business has enormous flexibility, such as establishing maximums amounts for reimbursement and setting eligibility requirements for participation. The biggest advantage to employees is that a Section 105 plan reimbursement is not considered taxable income. Most experts do not recommend self-administering a Section 105 plan because it is easy to overlook compliance obligations that put a business at financial risk. Section 105 plans need to comply with the following requirements: - COBRA - A Section 105 plan is subject to COBRA rules. - HIPAA Privacy - A Section 105 plan is governed by HIPAA Privacy rules. - Medicare Reporting - A Section 105 plan is subject to Medicare Secondary Payer (MSP) provisions. - Legal Plan Documents - ERISA requires that Section 105 plans be established and maintained pursuant to a written instrument. There are also Section 105 Nondiscrimination rules, which require that the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan. BUT there are companies that will administer section 105 plans, and they are actually very simple in practice: (1) The business establishes a formal written Section 105 plan (administrators will usually write up these documents). (2) The business determines the amounts available to each employee for reimbursements during a period of coverage (generally a year). (3) As eligible expenses are submitted, the business reimburses the employees (100% tax-free) up to the available amounts. (4) Unused funds at the end of the year are typically carried over to the next year.