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Medical Reimbursement Plan

Small businesses can use medical reimbursement plans to cover the cost of employees’ medical expenses, allowing them to reduce taxes and provide a valuable benefit for employees.

Commonly referred to as health reimbursement arrangement, health savings account and Section 125 plan

Do I Qualify for a Medical Reimbursement Plan?

Medical reimbursement plans allow employers to reimburse employees for eligible medical expenses. There are several plan types available.

2022 Medical Reimbursement Plan Details

There are multiple medical reimbursement plan strategies available to small businesses. Each plan has different rules business owners must follow in order to qualify.

There are three types of HRAs:

•Qualified small employer health reimbursement arrangement (QSEHRA)
•Individual coverage health reimbursement arrangement (ICHRA)
•Group coverage health reimbursement arrangement (GCHRA)

What Is an IRC Section 125 Plan?
A Section 125 Plan, also known as a cafeteria plan, allows employees to pay for certain benefits, such as group health insurance, vision and dental plans, directly from their wages before taxes are deducted. It is also a common way employers allow employees to contribute to group term life insurance plans, Flexible Spending Accounts (FSAs) and elective defined contribution plans.

IRC Section 105 Plan
Also known as a health reimbursement arrangement (HRA), this strategy typically applies to Schedule C and single-member LLC business entities and can also work for family management companies. It allows employers to provide tax-free reimbursements to employees for medical and insurance expenses, rather than pay premiums to an insurance company.

An HRA is likely a good option if:

•The business has at least one employee (can be a spouse)
•Employees are older than 25, and
•Reasonable compensation is paid

With a Section 105 plan, employees can be reimbursed for:

•Premiums paid from a spouse’s W-2 (from another job)
•Long-term care insurance
•Medical expenses on Form 1040
•Special needs child expenses

Medical Reimbursement Plan

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•Reduces taxable income
•Reduces self-employment tax
•Provides a valuable benefit for employees and owner-employees


•Paperwork and tracking required
•May need to work with an insurance broker to set up a plan
•Conflicting strategies: Self-Employed Health Insurance Deduction, Family Office Management Company

Assumptions When Taking the Medical Reimbursement Plan

You have selected the appropriate medical reimbursement plan for your business.

Conflicting Strategies

•Self-Employed Health Insurance
•Family Office Management Company

Requirements to Claim the Medical Reimbursement Plan

•The business must have an active medical reimbursement plan in place.
•For certain plans, the business must have fewer than 50 employees.

Business Entities That Can Claim the Medical Reimbursement Plan

•Schedule C
•Schedule F
•C Corporation

The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.

Prosperity Tax Advisors
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