Section 105 Medical Reimbursement Plan

By Saif Akhtar, Co-Founder & COO, SimplyHRA. Published and updated November 14, 2026.

The Legal Foundation of HRAs: IRC § 105(b)

Internal Revenue Code Section 105 governs amounts received under accident and health plans. While gross income generally includes employer-provided accident and health benefits under Section 105(a), Section 105(b) creates a complete tax exclusion for reimbursements paid directly to employees for substantiated medical care expenses defined under IRC § 213(d).

All modern Health Reimbursement Arrangements -- including ICHRAs, QSEHRAs, and Excepted Benefit HRAs (EBHRAs) -- operate as specialized Section 105 plans. When an employer disburses reimbursements through SimplyHRA:

• Federal Income Tax: 100% excluded from employee gross income (not reported on Form W-2 Box 1).
• FICA & FUTA Taxes: Exempt from both employer and employee Social Security (6.2%) and Medicare (1.45%) payroll taxes.
• Corporate Tax Deduction: Fully deductible to the employer as an ordinary and necessary business expense under IRC § 162.

Section 105 HRA Types Compared

Frequently Asked Questions

What is the tax advantage of a Section 105 reimbursement plan?

Reimbursements made through a compliant Section 105 plan are 100% tax-free to employees for federal income, Social Security, and Medicare taxes. Sponsoring employers deduct the entire reimbursement amount as an ordinary business health expense under IRC § 162.

Can S-Corporation 2% shareholders participate in Section 105 HRAs?

No. Under IRC § 1372, more than 2% shareholders in an S-Corporation and their family members are treated as partners for fringe benefit purposes and cannot receive tax-free Section 105 reimbursements. However, W-2 non-owner employees remain fully eligible.