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1Fix the driver behind crashes, sound loss and screen glitches2Clear out junk files and repair common Windows errors3Scan for outdated or missing drivers - takes under a minuteAn IRC Section 105(b) medical expense reimbursement plan is an employer-provided accident or health arrangement that can reimburse employees for qualifying medical-care expenses without including those reimbursements in gross income. The exclusion depends on the written plan, the type of expense, timely substantiation and the treatment of unused amounts. Section 105(b) is a tax rule, not a label that automatically makes every employer payment arrangement tax-free. An arrangement may also have to satisfy Affordable Care Act (ACA) market-reform and other benefit-plan requirements.
What Section 105(b) does
Section 105(b) addresses amounts received through an employer’s accident or health plan to pay medical-care expenses. When the statutory and plan requirements are met, a reimbursement for qualifying care is generally excluded from the employee’s gross income. The employer’s plan must actually be designed and administered as an accident or health arrangement; calling a stipend or allowance a “105(b) plan” does not establish the exclusion.
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IRS Publication 15-B (2026), the Employer’s Tax Guide to Fringe Benefits, explains the broader tax treatment of employer-provided accident and health benefits. Revenue Ruling 2005-24 provides a detailed example of how a reimbursement plan’s terms, substantiation and treatment of unused amounts affect the result. Those authorities evaluate the plan and its operation, not merely its name.
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Medical care under Section 213(d)
Revenue Ruling 2005-24 describes reimbursements limited to medical-care expenses that qualify under IRC Section 213(d). In practical terms, the expense must be for diagnosis, cure, mitigation, treatment or prevention of disease, or for treatment affecting a structure or function of the body, as defined by the tax rules. A plan document should state which categories it accepts and what documentation is required.
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Whether a particular item qualifies is fact-specific. An expense that is merely beneficial to general health, personal consumption or convenience may not satisfy the medical-care definition. The plan administrator should apply the plan’s definition consistently and retain the records used to approve each claim.
Whose expenses may be covered
The ruling’s stated facts say: "The Plan reimburses the medical care expenses of both current and former employees (including retired employees), their spouses and dependents." That sentence describes the plan in the 2005 ruling; it is not a universal requirement or permission for every employer. Your plan document controls who is eligible, and separate rules may affect former employees, retirees, spouses and dependents.
How a reimbursement normally works
- Enrollment and eligibility: The employee becomes eligible under the written accident or health plan. Confirm whether coverage is limited to current employees or extends to former employees, spouses or dependents.
- Incurred expense: The covered person receives care and incurs an expense during a period the plan covers. IRS HRA guidance generally requires an expense to be incurred on or after the date the person is enrolled.
- Claim and substantiation: The participant submits documentation showing the provider, date, person receiving care, amount and nature of the expense, together with any explanation required by the plan.
- Plan review: The administrator verifies that the expense is eligible, was incurred during the permitted period and has not already been reimbursed or deducted elsewhere.
- Payment: The plan reimburses the substantiated amount under its terms. The employer records the payment and applies the plan’s rules for any remaining balance.
Revenue Ruling 2005-24 emphasizes substantiation before payment. A participant’s certification alone may not be enough if the plan requires independent documentation. Employers should keep claim records and a procedure for requesting additional information when a receipt or explanation is incomplete.
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Why substantiation and timing matter
Substantiation separates a reimbursement of medical care from a taxable cash allowance. The administrator should be able to connect each payment to a specific expense and verify that it meets the plan’s definition. A claim system should record the date the expense was incurred, not only the date a participant submitted a receipt.
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For an HRA-style arrangement, IRS guidance generally looks to whether the expense was incurred on or after enrollment. A plan cannot assume that a pre-enrollment bill is eligible simply because the participant submits it after joining. The written plan may contain additional deadlines, documentation standards or coordination rules.
- Keep an itemized statement or explanation of benefits rather than only a credit-card slip.
- Identify the covered person and date of service.
- Confirm the expense has not been reimbursed by another plan or used for an impermissible double benefit.
- Apply the same review standard to comparable claims.
What happens to unused amounts
Carryforward and forfeiture
A plan may specify that unused amounts carry forward, expire at the end of a period or are forfeited when eligibility ends. The effect depends on the written terms and applicable tax and benefit rules. The plan should explain whether a balance remains available after a year, after termination or after retirement.
Why cash-outs are risky
Revenue Ruling 2005-24 specifically addresses plans that pay unused reimbursement amounts in cash or provide other nonmedical benefits. Do not describe a balance as freely cashable while also promising Section 105(b) exclusion. A cash-out feature can create a distinct tax issue, and the result depends on the plan’s exact terms and facts. If an employer wants to offer a taxable wellness payment or other cash benefit, it should be documented and reported under the rules that apply to that benefit rather than presented as a tax-free medical reimbursement.
Section 105(b) is not the same as an HRA or QSEHRA
“Section 105(b) plan” describes a tax question about reimbursements. An HRA or QSEHRA is a particular type of employer health arrangement with its own design and compliance rules. A plan can be evaluated under Section 105(b) while also being subject to rules that apply to HRAs or other group health plans.
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| Comparison point | What to verify |
|---|---|
| Funding | Whether the arrangement is funded solely by the employer or involves employee salary-reduction contributions. The funding method can affect which plan rules apply. |
| Eligible expenses | The plan’s definition of Section 213(d) medical care, plus exclusions and documentation requirements. |
| Timing | When an expense must be incurred relative to enrollment and the claim-submission deadline. |
| Unused amounts | Whether balances carry forward, are forfeited or can trigger a cash or nonmedical benefit; cash-out treatment requires separate analysis. |
| Regulatory category | Whether the arrangement is a general HRA, a QSEHRA or another employer plan, and which ACA and group-health-plan requirements follow. |
QSEHRA limits are not universal Section 105(b) limits
IRS Publication 15-B (2026) lists annual QSEHRA limits of $6,450 for employee-only arrangements and $13,100 for family coverage for 2026. Those amounts apply to the qualified small employer health reimbursement arrangement category and should not be presented as a cap on every Section 105(b) reimbursement plan.
IRS Publication 969 (2025) states that there is no general limit on employer contributions to an HRA. That statement does not eliminate plan-specific limits, eligibility conditions, substantiation requirements or ACA obligations. An employer must first identify the arrangement’s legal category before applying a contribution limit.
Tax exclusion and ACA compliance are separate questions
A reimbursement may satisfy the income-tax conditions of Section 105(b) and still raise a separate health-plan compliance issue. IRS guidance on employer health care arrangements explains that some reimbursement arrangements are group health plans subject to ACA market reforms. The analysis can depend on how the arrangement is funded, whether it is integrated with other coverage and what benefits it offers.
Employers should therefore run two checks: first, whether each payment is an excludable reimbursement of qualifying medical care; second, whether the plan’s design and operation comply with ACA market reforms and other applicable benefit-plan requirements. A tax exclusion is not a blanket exemption from those rules.
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How employees should evaluate an employer’s plan
- Ask for the written plan description. Find the eligibility classes, covered family members, effective date and termination provisions.
- Read the expense definition. Check whether the plan uses Section 213(d), lists exclusions or imposes substantiation standards beyond a receipt.
- Check timing rules. Confirm when coverage begins, whether pre-enrollment expenses are excluded and how long you have to submit a claim.
- Understand balance rules. Determine whether unused amounts carry forward, expire or are forfeited, and whether any post-termination claims are allowed.
- Review coordination. Ask how the plan handles insurance payments, other employer plans, health savings accounts and personal deductions so the same expense is not counted twice.
- Keep records. Retain receipts, explanations of benefits and approval notices for the period required by the plan and applicable tax rules.
How employers should administer one
Draft precise terms
The document should identify the employer, eligible participants, covered dependents, effective dates, qualifying expenses, substantiation process, reimbursement limits, claim deadlines, carryforward or forfeiture rules and treatment at termination. If former employees or retirees are covered, say so explicitly; the ruling’s coverage of those groups was a fact of that plan, not a default rule.
Separate claims from payroll cash
Use a claims process that requires evidence before payment and distinguishes medical reimbursements from taxable wages, bonuses or wellness incentives. A general allowance paid without regard to actual expenses is difficult to characterize as a Section 105(b) reimbursement.
Coordinate compliance reviews
Review the arrangement for ACA market reforms and other group-health-plan obligations in addition to the income-tax analysis. Publication 15-B, Publication 969 and the IRS guidance on employer health care arrangements address different parts of the framework; none substitutes for examining the employer’s actual documents and operations.
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- Using the label as proof: Calling a benefit a “105(b) plan” does not make payments excludable. Correction: analyze the written terms and actual administration.
- Paying first and documenting later: Correction: require substantiation before reimbursement, as emphasized in Revenue Ruling 2005-24.
- Reimbursing any wellness purchase: Correction: test the expense against the plan’s Section 213(d) definition.
- Allowing unrestricted cash-outs: Correction: document carryforward or forfeiture rules and obtain separate tax advice before offering cash or nonmedical benefits.
- Applying QSEHRA limits to every plan: Correction: use the $6,450 and $13,100 figures only for 2026 QSEHRA arrangements.
- Ignoring ACA rules: Correction: perform a separate market-reform review; tax treatment alone is not a compliance determination.
- Taking a personal deduction for a reimbursed bill: Correction: coordinate reimbursements with any itemized medical-expense deduction.
How reimbursements affect an individual’s medical-expense deduction
IRS Publication 502 (2025), Medical and Dental Expenses, addresses personal medical-expense deductions. A reimbursement that is excluded from income generally cannot also be used to claim a personal deduction for the same expense. Publication 502 helps with the individual deduction question; it is not the authority for deciding whether the employer’s arrangement qualifies under Section 105(b). Keep separate records for employer reimbursements and expenses paid personally.
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Worked examples
Substantiated eligible claim
An enrolled employee submits an itemized provider statement for a covered medical service, identifies the covered dependent and shows the amount not paid by insurance. The administrator confirms that the service is a Section 213(d) expense incurred after enrollment and reimburses it under the written plan. Those facts fit the basic Section 105(b) reimbursement model, subject to the plan’s other terms.
Unrestricted year-end payment
A plan pays every participant the unused balance in cash at year-end, regardless of whether the participant incurred medical expenses. That feature is not the same as reimbursing substantiated care and is the type of cash or other-benefit treatment that Revenue Ruling 2005-24 flags for separate analysis.
QSEHRA confusion
A small employer offers a QSEHRA in 2026 and advertises the $13,100 family limit as a limit for all Section 105(b) plans. The description is too broad. The $13,100 amount is the 2026 QSEHRA family-coverage limit; it does not establish a universal Section 105(b) ceiling.
Questions to ask before relying on the tax treatment
- Is there a written accident or health plan, rather than an informal reimbursement promise?
- Which people may participate, and when does eligibility begin?
- Does the plan limit payments to substantiated Section 213(d) medical-care expenses?
- Are expenses incurred before enrollment excluded?
- What happens to unused amounts at year-end, termination and retirement?
- Does the arrangement create an ACA market-reform or other group-health-plan issue?
- Could the same expense be reimbursed or deducted twice?
Because the IRS authorities do not determine the result for an individual employer’s undocumented or unusual arrangement, employers should have the plan and its administration reviewed by a qualified benefits or tax professional before promising tax-free treatment.
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