An IRC Section 105(b) medical expense reimbursement plan is an employer-sponsored accident or health plan that can reimburse qualifying medical-care expenses without including those reimbursements in an employee’s gross income. The exclusion is not automatic: the written plan, the type of expense, substantiation, payment timing, unused-balance rules, and other health-plan requirements all matter.
What Section 105(b) does
Section 105(b) of the Internal Revenue Code addresses payments from an employer’s accident or health plan. When the statutory and plan requirements are met, amounts paid to reimburse an employee for qualifying medical care generally are not included in the employee’s gross income. The rule applies to the reimbursement arrangement and its operation, not merely to a label such as “medical reimbursement plan” or “HRA.”
IRS Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits, describes accident and health plans and the tax treatment of employer-provided benefits. Revenue Ruling 2005-24 provides a detailed example of a reimbursement plan and focuses on the expenses covered, substantiation, and treatment of unused amounts. Neither source says that every arrangement called a Section 105 plan automatically qualifies.
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How a tax-free reimbursement is supposed to work
1. The plan must be an accident or health arrangement
Section 105(b) concerns payments made through an employer’s accident or health plan. The plan should identify who may participate, what expenses qualify, how claims are submitted, and how benefits are paid. A one-time employer payment, informal promise, or payroll practice is not validated simply by calling it a “105(b) reimbursement.”
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2. The expense must be qualifying medical care
Revenue Ruling 2005-24 describes reimbursements limited to medical-care expenses within Section 213(d). In practical terms, the plan must define eligible medical care consistently with the governing tax rules and its own terms. A benefit that reimburses ordinary personal spending, unrestricted allowances, or expenses outside the plan’s medical-care definition does not become tax-free merely because the employee used the money for health-related reasons.
3. The expense generally must be incurred while the person is covered
IRS guidance for HRAs says expenses generally must be incurred on or after the date the individual is enrolled. A plan document may contain additional restrictions, so the claim date, the service date, and the participant’s enrollment date should be checked together. An expense incurred before enrollment is not automatically reimbursable just because the claim is submitted later.
4. The claim must be substantiated before payment
Revenue Ruling 2005-24 describes claims being substantiated before reimbursement. Substantiation normally means documentation showing the nature of the medical expense, the date it was incurred, the amount, and that the expense has not already been reimbursed elsewhere. A participant’s certification alone may not satisfy the plan’s requirements when the plan or applicable guidance calls for independent documentation.
Plan administrators should establish a repeatable process: collect the receipt or insurer explanation of benefits, verify the service date and amount, confirm that the expense is eligible, and approve payment only after the review is complete. Paying first and asking for proof later creates a different compliance risk from a documented claim process.
5. The reimbursement must follow the written plan
The document controls important details such as eligible family members, annual or lifetime limits, carryovers, forfeitures, claim deadlines, and whether former employees may submit claims. The tax result depends on the actual terms and administration, not only on an employer’s intention.
Who may be covered?
Revenue Ruling 2005-24 states, in describing that ruling’s facts: “The Plan reimburses the medical care expenses of both current and former employees (including retired employees), their spouses and dependents.” This is a description of the ruling’s plan, not a universal instruction that every employer must or may cover all of those groups on identical terms.
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An employer should read the eligibility section of its own plan. It may cover current employees, former employees, retirees, spouses, dependents, or another defined class, subject to the plan document and other applicable requirements. Extending coverage to a new group without amending the document can create administration and tax problems.
What happens to unused amounts?
Carryforward or forfeiture
A plan may specify that unused amounts carry forward for future eligible expenses or are forfeited under stated conditions. The exact rule must be written and applied consistently. A carryforward is still a medical benefit; it is not an unrestricted account balance that the participant can withdraw for any purpose.
Cash-outs and unrelated benefits
Revenue Ruling 2005-24 expressly considers arrangements that pay unused reimbursement amounts in cash or provide other benefits. Do not describe unused amounts as freely cashable while also promising Section 105(b) exclusion. If a participant can elect cash or a nonmedical benefit instead of medical reimbursement, the tax treatment can change, and the result depends on the plan terms and facts.
Administrators should document what happens when employment ends, when a claim deadline passes, or when a participant has money remaining but no additional eligible expenses. A forfeiture or permitted carryforward is materially different from a routine cash payment.
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“Section 105(b) plan” describes a tax rule applied to qualifying reimbursements. “HRA” describes a type of employer health reimbursement arrangement with its own plan and operational requirements. “QSEHRA” is a narrower statutory category for eligible small employers with specific eligibility and annual-limit rules. One label cannot answer all of the tax and health-plan questions.
| Issue | What to examine | Why it matters |
|---|---|---|
| Funding | Whether the arrangement is funded by the employer or uses employee salary-reduction contributions | Funding design can invoke different tax and benefit-plan rules; do not assume every funding method is the same Section 105(b) arrangement. |
| Eligible expenses | Medical-care definition, exclusions, documentation, and claim deadlines | Only qualifying, properly substantiated expenses should be reimbursed as tax-free medical benefits. |
| Timing | When the expense was incurred compared with enrollment and coverage | HRAs generally require the expense to be incurred on or after enrollment, subject to the plan’s terms. |
| Unused amounts | Carryforward, forfeiture, and any option for cash or other benefits | Unrestricted cash-out features can undermine the intended exclusion or produce a different tax result. |
| Plan category | General HRA or another employer plan versus a QSEHRA | QSEHRAs have category-specific eligibility and annual limits; those limits are not universal Section 105(b) limits. |
| Compliance | Income-tax exclusion plus ACA market reforms and other group-health-plan rules | A reimbursement may be tax-favored yet still fail a separate health-plan requirement. |
Are there contribution limits?
There is no universal Section 105(b) dollar cap stated in the cited IRS guidance. IRS Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans, says there is no general limit on employer contributions to an HRA, although the plan document and other legal requirements still govern.
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Do not confuse that statement with the limits for a QSEHRA. IRS Publication 15-B (2026) lists the following QSEHRA limits for 2026:
| QSEHRA coverage level | 2026 limit | Scope of the figure |
|---|---|---|
| Employee-only arrangement | $6,450 | 2026 QSEHRA limit |
| Family coverage | $13,100 | 2026 QSEHRA limit |
These amounts apply to QSEHRAs for 2026. They do not automatically limit every employer medical reimbursement plan operating under Section 105(b). An employer must first identify the plan category, then apply the limits and eligibility rules for that category.
How ACA rules fit into the analysis
The tax question and the health-plan compliance question are separate. IRS guidance on employer health care arrangements and Affordable Care Act tax provisions explains that some reimbursement arrangements are group health plans subject to ACA market reforms. A plan can therefore require two reviews:
- Tax review: Are the payments for qualifying medical care, properly substantiated, and made under the written plan so that Section 105(b) can apply?
- Health-plan review: Does the arrangement satisfy applicable ACA market reforms and other group-health-plan requirements?
Calling an arrangement an HRA, a Section 105 plan, or a QSEHRA does not eliminate the second review. Employers should evaluate the plan’s structure, the class of participants, how it interacts with other coverage, and the rules applicable to that category.
Employer setup and administration checklist
- Choose and document the arrangement. Identify whether the employer is adopting a general reimbursement plan, an HRA, a QSEHRA, or another design. State eligibility, covered family members, eligible expenses, limits, claim deadlines, and unused-balance treatment.
- Define medical care precisely. Tie reimbursable expenses to the plan’s governing definition and list exclusions or special documentation requirements. Avoid vague language such as “any health-related purchase.”
- Set enrollment and expense dates. Tell participants when coverage begins and make clear that expenses incurred before enrollment may not qualify under the applicable HRA rules.
- Build pre-payment substantiation. Require documentation that identifies the expense, date, amount, and patient. Establish who reviews claims and how duplicate reimbursement is prevented.
- Control payments. Pay only approved claims through the plan’s stated method. Do not automatically convert a remaining balance into cash or an unrelated perk.
- Test the category-specific rules. If the plan is a QSEHRA, apply its eligibility and 2026 limits. If it is another group health plan, review the applicable ACA market reforms and related requirements.
- Keep records. Retain the plan document, amendments, enrollment records, claim substantiation, approvals, payments, and communications long enough to demonstrate consistent operation.
- Review changes before implementation. A change to eligible expenses, participants, carryovers, or termination treatment can alter the tax and compliance analysis. Amend the document and update administration before using the new rule.
Employee checklist: what to verify before submitting a claim
- Confirm that you were enrolled when the expense was incurred.
- Check that the service or item falls within the plan’s eligible medical-care definition.
- Collect an itemized receipt, provider statement, or insurer explanation of benefits showing the date and amount.
- Confirm that another plan, insurer, or employer has not already reimbursed the same expense.
- Submit the claim by the plan’s deadline and keep copies of the documentation.
- Read the plan’s termination and unused-balance rules rather than assuming the remaining amount can be taken as cash.
Common mistakes and how to correct them
“The name proves it is tax-free.”
Problem: An employer labels a payment a Section 105(b) benefit without a qualifying plan or claim controls.
Correction: Review the written plan, eligible expenses, substantiation, and payment process. The label is not a substitute for compliance.
“Employees can submit estimates and provide receipts later.”
Problem: Payment occurs before the expense is substantiated.
Correction: Require substantiation before payment, as described in Revenue Ruling 2005-24, and establish a process for rejecting or correcting unsupported claims.
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“Any expense after enrollment qualifies.”
Problem: Enrollment timing is treated as the only eligibility test.
Correction: Verify both the date and the nature of the expense. The expense must also meet the plan’s medical-care definition and documentation rules.
“Unused money can always be paid out.”
Problem: A cash-out or unrelated benefit is presented as part of the tax-free reimbursement.
Correction: Apply the written carryforward or forfeiture rule. Obtain a specific tax and plan-compliance analysis before adding any cash or nonmedical election.
“The QSEHRA limit applies to every Section 105(b) plan.”
Problem: The 2026 QSEHRA amounts are treated as a universal cap.
Correction: First determine whether the arrangement is actually a QSEHRA. IRS Publication 969’s statement that there is no general HRA contribution limit does not remove other plan-specific requirements.
“Tax exclusion means ACA compliance.”
Problem: The employer stops after reviewing income-tax treatment.
Correction: Separately test whether the arrangement is a group health plan subject to ACA market reforms and other applicable requirements.
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Examples that show why the details matter
Properly documented eligible claim
An enrolled employee incurs an expense that the written plan treats as qualifying medical care. The employee submits an itemized document showing the service date and amount. The administrator verifies eligibility and pays the claim from the plan. This is the type of documented reimbursement process that supports the intended Section 105(b) treatment, assuming the plan satisfies all other applicable rules.
Expense incurred before enrollment
An employee enrolls on July 1 but submits a claim for a June 20 expense. Even if the claim is filed in July, the expense was incurred before enrollment. Under the general HRA timing guidance, it would not ordinarily qualify unless the specific arrangement and governing rules provide otherwise.
Unrestricted year-end payout
A plan promises to reimburse medical expenses during the year and pay any remaining balance in cash on December 31. That cash-out feature is not the same as a carryforward or forfeiture rule. Revenue Ruling 2005-24 specifically addresses unused amounts paid in cash or other benefits, so the employer should not promise that the entire arrangement remains excluded from income.
QSEHRA mistaken for a general HRA
An eligible small employer offers a QSEHRA in 2026 and budgets $7,000 for an employee-only arrangement. The employer cannot rely on general HRA terminology to ignore the QSEHRA’s $6,450 2026 limit. The category-specific limit must be applied to that QSEHRA design.
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How personal medical deductions are different
Whether an employer reimbursement is excluded from an employee’s income is different from whether the employee may claim a personal medical-expense deduction. IRS Publication 502 (2025), Medical and Dental Expenses, explains how reimbursements affect the individual deduction. An expense reimbursed by an employer generally cannot also be used as a personal deduction to the extent of that reimbursement.
Publication 502 is therefore not the authority for deciding whether an employer plan qualifies under Section 105(b). Employers and employees should analyze the plan exclusion and the individual deduction as separate questions.
What documents should you ask for?
For an employer, the essential records are the executed plan document and amendments, participant eligibility records, enrollment dates, the eligible-expense definition, claim forms, receipts or equivalent substantiation, approval records, payment history, and records showing how unused amounts were handled. For an employee, the practical set is the summary or plan document, enrollment confirmation, itemized medical documentation, claim submission, and reimbursement statement.
If a plan’s terms are unclear, ask the administrator to identify the exact provision governing the claim, the relevant enrollment date, and the rule for any remaining balance. A tax professional or benefits counsel can then review the documents and facts rather than relying on the plan’s marketing name.
Bottom line for employers and employees
IRC Section 105(b) can exclude qualifying medical reimbursements from an employee’s gross income when they are paid through a compliant accident or health plan, concern eligible medical care, are substantiated before payment, and follow the written rules for timing and unused amounts. The provision is not a universal label, a guaranteed tax result, or a blanket dollar limit. Identify the plan category, verify the claim process, distinguish QSEHRA limits from general HRA rules, and perform a separate ACA compliance review.
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