What is a Section 105 plan?

A glowing glass scroll casting a bridge of light and coins to a family at their home — a Section 105 plan at work

Quick Answer

A Section 105 plan is an IRS-recognized medical reimbursement arrangement that lets a business reimburse medical expenses tax-free. For self-employed households, the classic setup runs reimbursements through a legitimately employed spouse.

A Section 105 plan is a medical reimbursement arrangement under Internal Revenue Code Section 105 that allows a business to reimburse employees for medical expenses tax-free. Self-employed households most often use Section 105 by legitimately employing a spouse in the business and reimbursing family medical costs as an employee benefit. The structure can convert personal medical spending into deductible business expense, but it demands real employment, real work performed, and airtight documentation.

Section 105 is the oldest trick in the tax-advantaged health playbook, and the most misunderstood. Done right, it converts family medical costs into legitimate business expense. Done sloppy, it converts an audit into a bad month.

How does the classic setup work?

The business legitimately employs the owner’s spouse — real work, real hours, payroll records. The business then offers the employee (the spouse) a Section 105 medical reimbursement benefit covering the employee’s family, which includes the owner. Family medical costs flow through the business as a deductible benefit expense.

What makes or breaks it?

Documentation. The employment must be real, compensation reasonable, and the plan documents in place before reimbursements start. Entity type matters too — the math changes across sole proprietorships, LLCs, and S-corps, and S-corp owners face the same family-attribution walls that complicate ICHRA participation.

ProtectHealth’s standing rule applies double here: insurance nerds, not tax professionals. A Section 105 conversation that skips the tax professional is a conversation happening in the wrong order. The broader landscape of structures sits in the parent guide, What Is An ICHRA?, and the tax-advantaged comparison.

Frequently Asked Questions

Who can use a Section 105 plan?

Businesses with W-2 employees can use Section 105 plans. Self-employed owners typically access the structure by legitimately employing a spouse, since owners themselves are generally not eligible employees for their own plan.

What can a Section 105 plan reimburse?

A Section 105 plan can reimburse qualifying medical expenses, including health insurance premiums, deductibles, dental, and vision costs, depending on plan design.

What makes a spouse's employment legitimate for Section 105?

Legitimate employment means real work performed, reasonable compensation, payroll records, and documented hours — not a paper arrangement. Weak documentation is the primary reason Section 105 setups fail under review.

Is a Section 105 plan the same as an ICHRA?

No. ICHRA is a specific type of HRA focused on reimbursing individual insurance premiums for employee classes. Section 105 is the broader reimbursement authority, and classic Section 105 strategies center on the employed-spouse setup.

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ProtectHealth brokers are insurance professionals, not tax professionals. Eligibility for any coverage or tax-advantaged structure depends on business structure, income, and household situation.