ISO: Explanation/Definition of 105 plans and relationship to 125 plans

[Guest MSMA]

Greetings all!

To stay competative in todays health insurance market, my employer is looking to introduce a "105 reimbursement plan" to our membership. Many of us are having a difficult time discerning the difference between 105, 125, FSA's etc.

Any advice or references on this would be much appreciated.

TIA

[mroberts]

Simply put, a Section 105 plan is a flexible spending account that an employer funds and a section 125 plan is a flexible spending account which is funded by the employee.

I would be a little hard pressed to recommend putting one of these in these days simply because you may as well use whatever money you were considering to allocate to offset the medical premium increases. These were more popular in the 90's when managed care had medical premiums in check. What industry are you in? Shoot me an email if you'd like to discuss further.

[papogi]

Basically, Section 125 allows an employee to get around payroll constructive receipt issues. Under 125, employees choose between taxable cash and non-taxable benefits, and the employee costs for the benefits are not included in their gross income. The benefits offered under a 125 plan (flex plan or cafeteria plan) are each governed by separate tax codes. For instance, Section 105 deals with medical, health, and accident benefits, Section 129 deals with dependent care, etc. Again, Section 105 addresses medical and health benefits, and specifically can allow benefits received from these plans to go to the recipient tax-free. FSA’s can be offered in or outside of a cafeteria plan. A typical FSA is completely employee-funded (not always). A 105 reimbursement plan is company-funded, but risk-shifting rules and uniform reimbursement rules, etc. still apply.

[GBurns]

I think that you should explain more of the what and the why of what your employer is proposing.

I also wonder why an employer has "membership" to which he is offering this plan?

It is possible that the employer could be getting a lower premium for the health insurance but at the cost of higher out-of pocket costs to the employees. The employer might be considering setting up a 105 MERP to be able to pick up the additional expenses that an employee might incur over the old out-of pocket up to the new out of pocket. This would be perfectly normal and morally correct.

The employees would still get the health insurance protion of the premium that the employer pays as not includable in their gross income as per section 106.

The employees would be able to pay their portion on a pre-tax basis under section 125 thereby getting some tax relief.