Introduction
Navigating the complex landscape of health insurance and taxes is a perennial headache for many physicians. With skyrocketing premiums and ever-evolving tax codes, it’s easy to feel trapped between exorbitant out-of-pocket costs and missed deductions. Yet, there exists a little-known strategy—rooted in Section 105 of the Internal Revenue Code—that allows doctors to turn personal health insurance expenses into 100 percent tax-free reimbursements. This legal avenue, often overlooked by physician practices and solo practitioners, offers a robust way to slash taxable income while covering family medical costs. In this deep-dive, we’ll demystify how doctors can implement a Section 105 Health Reimbursement Arrangement (HRA) in 2025, compare it with alternative tax-saving vehicles, and highlight crucial compliance tips to ensure your plan remains bulletproof.

Section 105 Plan for Doctors

A Section 105 HRA is an employer-funded arrangement that reimburses employees—including owner-employees—for qualified medical expenses, including insurance premiums, on a tax-free basis. Under IRS Publication 969 (2024), reimbursements made through a properly drafted Section 105 plan are excluded from an employee’s gross income, effectively turning what would be personal expenses into deductible business costs (IRS Publication 969).

Key features of a Section 105 plan:

1. Tax-Free Reimbursements: Both employer deductions and employee receipts remain untaxed, offering double-layer savings.
2. Flexibility of Expenses: Beyond insurance premiums, plans can cover co-pays, prescriptions, dental, vision, and even long-term care expenses (PeopleKeep on Section 105 Plans).
3. Employer-Sponsored Structure: The practice must adopt a formal, written plan document outlining eligibility, benefits, and reimbursement procedures.

Physician practices—whether incorporated as C corporations, S corporations, LLCs, or partnerships—can leverage Section 105 HRAs. For owner-only S corporations, the practice simply lists the physician as an eligible employee and processes reimbursements through payroll, reporting them on Form W-2 but excluding them from taxable income (IRS on S Corp Health Insurance).

Eligibility for Tax-Free Health Benefits

Before rolling out a Section 105 HRA, confirm your practice type and eligible participants:

• Solo Practitioners & Spouses
  • If you operate a single-member LLC or sole proprietorship (Schedule C filer), you can structure a one-person HRA by naming only yourself (and spouse, if desired) as eligible participants. This blueprint often requires you to formally hire your spouse as the sole staff member to comply with nondiscrimination rules (Bradford Tax Institute 105-HRA Guide).
• S Corporations
  • As a > 2 percent shareholder-employee, your premiums are deductible by the S Corp and reported as wages on your W-2, then fully excluded through the HRA reimbursement mechanism (IRS S Corp Guidance).
• Partnerships & LLCs
  • Partnerships and multi-member LLCs electing partnership taxation must ensure that only partners (or their families) participate, with clear allocation of expenses in the partnership agreement.
• Group Practices
  • Multi-doctor practices can sponsor Section 105 HRAs as part of a group health plan, providing uniform benefits while meeting nondiscrimination requirements under IRC §105(h) and ACA rules (Brown & Brown 2025 Compliance Guide).

By aligning your practice structure with eligibility criteria, you unlock the ability to reimburse 100 percent of health costs—including premiums—that would otherwise be paid with after-tax dollars.

How to Establish Your Section 105 HRA

Implementing a compliant Section 105 HRA involves several key steps:

1. Draft a Written Plan Document
   • Detail eligibility rules, covered expenses, reimbursement caps, and claims procedures.
2. Set Benefit Levels
   • Decide on monthly or annual allowances per participant (e.g., ₦150,000/month).
3. Fund and Administer the Plan
   • Determine if you’ll self-administer or outsource to a third-party administrator (TPA) experienced in HRAs (TakeCommandHealth HRA Guide).
4. Process Reimbursements
   • Require substantiation (receipts, insurance invoices) before reimbursing, ensuring all claims align with IRS Section 213(d) definitions.
5. Maintain Compliance
   • Annually review nondiscrimination testing (for plans with more than one eligible employee) and update plan documents to reflect legislative changes or internal policy shifts.

With these steps—backed by professional advisors—you’ll have a robust HRA that stands up to IRS scrutiny and delivers real savings.

Section 105 vs. Section 125 Cafeteria Plans vs. HSAs

To help you choose the optimal tax-saving vehicle, consider the following comparison:

This table underscores how Section 105 HRAs uniquely let doctors reimburse premiums and a broad range of medical costs without statutory contribution caps, making it especially powerful for high-earned professionals.

Step-by-Step Implementation Guide

1. Assess Practice Structure
   • Solo vs. group practice, tax entity type, presence of spouse or children as employees.
2. Engage a Tax Advisor and TPA
   • Ensure plan document drafting, nondiscrimination testing, and claims administration meet all IRS and ACA requirements.
3. Finalize Plan Document
   • Include eligibility, covered expenses, reimbursement amounts, claim procedures, and plan year.
4. Adopt and Communicate
   • Hold a formal adoption meeting; distribute Summary Plan Descriptions (SPDs) to all eligible employees.
5. Open Separate Bank Account
   • Segregate HRA funds from general accounts to maintain clear audit trails.
6. Process Reimbursements
   • Upon receipt of qualifying expense documentation, reimburse employees and record deductions in corporate books.
7. Annual Review & Testing
   • For plans covering more than one participant, conduct nondiscrimination tests under IRC §105(h) and update plan documents as needed.

By following this roadmap, you’ll ensure your HRA is not only effective but also IRS-compliant—safeguarding your practice against audits and penalties.

Potential Pitfalls and Compliance Considerations

• ACA Integration: Beginning 2020, stand-alone HRAs must integrate with a group health plan or be replaced by Individual Coverage HRAs (ICHRAs) under ACA rules. Practices without traditional group coverage need to adopt an ICHRA design.
• Nondiscrimination Testing: Plans covering multiple employees must pass eligibility and benefits tests to avoid favoring highly compensated individuals.
• Reasonable Benefit Levels: Excessively generous reimbursement limits may trigger IRS scrutiny; align allowances with average market premiums.
• Proposed Tax Caps: The Republican Study Committee’s 2025 budget proposal suggests capping tax-free health benefits. While not yet law, stay alert to legislative shifts that could impact maximum reimbursement exclusions (BenefitsPro GOP Budget Proposal).
• Documentation: Retain evidence of plan adoption, SPDs, nondiscrimination test results, and claims paperwork for at least six years.

Staying proactive on these fronts will help you retain your tax-free status and avoid costly compliance errors.

Key Takeaways

• Maximize Deductions: Section 105 HRAs let doctors convert personal health costs into deductible business expenses.
• No Statutory Caps: Unlike FSAs and HSAs, Section 105 plans aren’t limited by statutory contribution thresholds, giving high-earning physicians more room to reimburse family insurance costs.
• Broad Expense Coverage: Insurance premiums, co-pays, vision, dental, and long-term care can all be reimbursed tax-free.
• Compliance Is Crucial: Proper plan design, nondiscrimination testing, and ACA integration ensure long-term viability.
• Act Now: With premium inflation showing no signs of slowing and proposed tax caps on the horizon, 2025 is the year to implement—or optimize—a Section 105 HRA in your practice.

By adopting this often-overlooked strategy, you’ll unlock substantial tax savings, bolster your practice’s bottom line, and enjoy peace of mind knowing your family’s health expenses are covered—completely tax-free.