What Is a Section 105(b) Plan? Tax-Advantaged Benefits Explained
Internal Revenue Code Section 105(b) is one of the most powerful — and most underutilized — provisions in the federal tax code for employer-sponsored benefits. It provides a mechanism through which employers can reimburse employees for medical care expenses, and those reimbursements are excluded from the employee's gross income. For employers, this exclusion means the reimbursement amounts are also exempt from FICA payroll taxes, creating a dual tax advantage that reduces costs for both parties.
Despite being available since the Internal Revenue Code was enacted, many small and mid-sized business owners have never heard of Section 105(b) or do not understand how to use it. This article breaks down what 105(b) is, how it works, what expenses it covers, and how modern programs like the Self Insured Medical Reimbursement Program (SIMRP) leverage it to deliver substantial employer savings.
The Legal Foundation: IRC §105(b)
Section 105 of the Internal Revenue Code addresses “Amounts Received Under Accident and Health Plans.” Subsection (b) specifically states that gross income does not include amounts paid to an employee to reimburse medical care expenses as defined under IRC §213(d), provided those expenses are not compensated by insurance or otherwise. The critical phrase is “not compensated by insurance” — this is what allows self-insured arrangements to qualify. The employer is not purchasing an insurance policy; instead, it is directly reimbursing eligible expenses.
This distinction matters because it means 105(b) plans do not require an insurance carrier, underwriting, or premium payments. The employer establishes a plan document specifying which medical expenses are covered, and reimbursements flowing through that plan receive the tax exclusion. There are no annual contribution limits imposed by Section 105(b) itself, unlike HSAs and FSAs which have statutory caps.
What Qualifies as a §213(d) Medical Expense?
The scope of expenses eligible for 105(b) reimbursement is defined by IRC §213(d), which covers the “costs of diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” This is a broad definition that encompasses far more than most employers realize. Eligible expenses include:
- Prescription medications — both generic and brand-name drugs prescribed by a licensed physician for the prevention or treatment of a medical condition
- Telemedicine consultations — physician visits conducted via phone or video that result in diagnosis, treatment recommendations, or prescription orders
- Mental health and behavioral health services — counseling, therapy, and psychiatric consultations for conditions including anxiety, depression, and substance use disorders
- Preventive screenings and lab work — blood panels, cholesterol testing, cancer screenings, and other diagnostic procedures aimed at early detection
- Dental and vision care — examinations, treatments, corrective lenses, and related medical expenses
- Hospital and surgical costs — including inpatient and outpatient procedures, anesthesia, and related medical services
The Preventive Care Benefits Program structures its SIMRP to cover a curated subset of these §213(d) expenses, focusing on the preventive categories that deliver the greatest employee value: over 1,000 prescription medications, unlimited telemedicine, mental health counseling, preventive lab work, and $150,000 in group term life insurance.
How a 105(b) Plan Creates Employer Savings
The tax advantage of Section 105(b) flows in two directions. For employees, reimbursements are excluded from gross income — meaning no federal income tax, no state income tax (in most states), and no FICA tax on the reimbursed amounts. For employers, the reimbursement amounts are deductible as a business expense under IRC §162, and because they are excluded from the employee's gross income, they are not subject to the employer's share of FICA (7.65%).
When combined with a Section 125 cafeteria plan, the savings mechanism becomes even more powerful. The SIMRP approach uses a $1,220 monthly pre-tax salary reduction through the Section 125 plan, followed by a post-tax reimbursement of the same amount under 105(b). The pre-tax reduction lowers FICA-taxable wages; the post-tax reimbursement restores the employee's net pay. The employer saves 7.65% on the $1,220 monthly reduction — $93.33 per employee per month, or $1,119.96 per year.
Compliance Requirements for 105(b) Plans
Section 105(b) plans must satisfy several compliance requirements to maintain their tax-advantaged status:
- Written plan document — the employer must maintain a formal plan document that specifies eligible benefits, covered employees, and reimbursement procedures
- Nondiscrimination testing — under IRC §105(h), self-insured medical reimbursement plans must not discriminate in favor of highly compensated individuals with respect to eligibility or benefits
- Substantiation of expenses — reimbursed expenses must be substantiated as qualifying §213(d) medical care expenses with appropriate documentation
- Employer-employee relationship — benefits must be provided to common-law employees (W-2 workers), not independent contractors (1099 workers)
- ACA coordination — the plan must be structured to comply with Affordable Care Act requirements, including coordination with any existing group health plan
The Preventive Care Benefits Program handles all compliance administration — including plan documentation, nondiscrimination testing, and ACA coordination — through its third-party administrator. Employers are not responsible for managing compliance internally. Learn more about compliance on the compliance and legal framework page.
105(b) vs. Other Tax-Advantaged Benefit Structures
Section 105(b) is often confused with other tax-advantaged arrangements, but the differences are significant. An HSA requires a High Deductible Health Plan and has annual contribution limits ($4,300 individual / $8,550 family for 2026). An FSA is subject to “use-it-or-lose-it” rules and a $3,300 annual cap. An HRA is employer-funded but does not inherently generate FICA savings through payroll restructuring.
A 105(b) plan structured as a SIMRP has no annual contribution limit imposed by the code section itself, no “use-it-or-lose-it” forfeiture provision, and no requirement for a high-deductible health plan. The SIMRP operates alongside existing insurance — it supplements rather than replaces the employer's group health plan (if one exists). This flexibility is why a growing number of employers are adopting the SIMRP structure as their primary payroll tax reduction strategy.
Getting Started with a 105(b) SIMRP
Implementing a Section 105(b) plan does not require the employer to become a benefits expert. The Preventive Care Benefits Program provides turnkey implementation — from plan document creation and payroll integration to ongoing compliance administration and employee enrollment support. Most employers are fully implemented within two to three payroll cycles, and savings begin appearing on the first payroll after enrollment.
If your business has W-2 employees and is currently paying FICA on their full taxable wages, a 105(b) SIMRP can reduce that obligation immediately. Read more about how the SIMRP works or explore the full legal and compliance framework that supports the program.