What is a self-insured medical reimbursement plan?
A self-insured medical reimbursement plan is an employer-sponsored plan that reimburses employees for eligible medical expenses using the employer's own funds, not an insurance policy. When the plan meets the requirements of Section 105 of the tax code, reimbursements for medical care are generally not taxable income to the employee.
The basic idea
"Self-insured" means the employer, not an insurance company, pays the benefits. "Medical reimbursement" means the plan pays back, or directly covers, eligible medical care expenses for employees. Most employers use a third-party administrator to run the plan, process claims and keep it compliant.
The tax rules behind it
- Section 105 covers amounts employees receive under an employer health plan. Reimbursements for medical care can be excluded from the employee's income when the rules are met.
- Section 106 generally excludes employer-provided health coverage from an employee's income.
- Section 125 lets employees pay their share of certain benefits with pre-tax salary reductions through a cafeteria plan.
- Section 105(h) adds nondiscrimination rules for self-insured plans, so the plan cannot unfairly favor highly compensated employees.
How it is used alongside existing coverage
Some programs pair a self-insured medical reimbursement plan with a Section 125 plan and preventive care services such as virtual visits and health screenings. They are designed to sit next to the health plan and payroll system an employer already has, not replace them.
What it is not
It is not an insurance policy, and it is not a replacement for major medical coverage. Depending on design, other laws can apply too, including ERISA, the Affordable Care Act, HIPAA and COBRA. Your administrator should tell you which apply and who handles each.
What to confirm before adopting one
- Which expenses are eligible, and how employees substantiate them.
- How any payment to employees is treated for tax purposes, in writing.
- Who performs nondiscrimination testing and files any required reports.
- What the plan costs the employer and the employee, in writing.
Common questions
Is a self-insured medical reimbursement plan health insurance?
No. The employer funds the benefits directly, usually with a third-party administrator handling claims. It does not replace major medical coverage.
Are reimbursements taxable to employees?
Reimbursements for eligible medical care are generally excluded from income under Section 105 when the plan meets the rules. Payments not tied to medical expenses are taxable.
Can small employers use one?
Yes, plans are available to employers of many sizes, but eligibility and value depend on your workforce, payroll and state. Ask for written numbers for your company.
See if your company is a fit
Book a free 15-minute call with a founder. You get written numbers and the plan documents before you decide anything.
Book a free callThis article is general information, not tax, legal, accounting, insurance or benefits advice. Everlasting Benefits Group is an independent sales representative for third-party plan administrators and may be paid by them when an employer adopts a plan. We are not a plan administrator, insurer, law firm or accounting firm. Tax rules change and results vary by state, payroll and plan design. Talk with your own CPA or attorney before adopting any plan.