Benefit Tax Code Sections Explained For Employers
Employer health and welfare benefits are tax-favored because of a short list of Internal Revenue Code sections. This reference explains what six of them say, in plain English, and where each meets the everyday work of running a plan.
Six Sections, Six Plain-English Guides.
General information, not legal or tax advice. Each guide cites the statute, regulation or IRS publication it relies on.
Section 106: Coverage Excluded From Income
The rule that keeps employer-provided health coverage out of an employee’s gross income, and the special cases written into it.
Sections 105(b) And 105(h)
When reimbursements for medical care are tax-free, and the test that stops a self-insured plan from favoring highly paid people.
Section 125: Cafeteria Plans
The statute that lets employees choose between cash and benefits without being taxed on the choice, and the written-plan requirement.
Section 132: Fringe Benefit Exclusions
The umbrella section for working condition, de minimis and transportation benefits, with several other exclusions beside them.
Section 6039D: Dormant Reporting
A reporting and recordkeeping section whose annual return the IRS has suspended, and what that does and does not mean.
Section 223: Health Savings Accounts
Who can contribute, how the annual limit works, and how the high deductible health plan definition fits in.
How The Sections Fit Together.
Federal tax law starts from a broad premise: pay of every kind is income unless a specific provision says otherwise. Employer-provided benefits stay out of an employee’s taxable pay only because Congress wrote exclusions for them, and each exclusion comes with conditions that the employer has to meet.
Section 106 is the foundation for health coverage. Section 105 governs what happens when a plan reimburses medical bills, and subsection (h) polices self-insured plans that favor higher-paid people. Section 125 lets employees choose between cash and benefits through a written plan without being taxed on the choice. Section 132 is a separate family of exclusions for items such as occasional low-value perks and commuting benefits. Section 223 creates the health savings account, with an eligibility test tied to a high deductible health plan. Section 6039D is a reporting section whose annual return the IRS has put on hold.
Why it matters: an exclusion that fails on a technicality can turn tax-free benefits into taxable wages. Knowing which section a benefit rests on tells you which conditions to check and which adviser to ask. As licensed insurance brokers, we explain the structure; your tax adviser or attorney should confirm how it applies to a specific decision.
Related Rules And Tools.
Health Savings Accounts for Employers
How employer HSA contributions work from setup to payroll.
Cafeteria Plan Document Requirements For Employers
What a written cafeteria plan should contain.
Self-Insured Health Plan Nondiscrimination Rules
Testing steps for self-insured plans.
Gift Cards, Cash And De Minimis Fringe Benefits
What small gifts and perks can stay tax-free.
A Compliance Calendar for Your Plan Year
Dates and tasks across the plan year.
Affordable Care Act for Employers
The employer mandate and its reporting.
Laws And Sources
26 U.S.C. 105 — Amounts received under accident and health plans, including the self-insured nondiscrimination rule in subsection (h).
26 U.S.C. 106 — Contributions by an employer to accident and health plans.
26 U.S.C. 125 — Cafeteria plans, including the written plan requirement and simple cafeteria plans.
26 U.S.C. 132 — Certain fringe benefits, from working condition to qualified transportation.
26 U.S.C. 6039D — Returns and records for certain fringe benefit plans.
26 U.S.C. 223 — Health savings accounts and the high deductible health plan definition.
26 CFR 1.105-11 — Regulation on self-insured medical reimbursement plans.
26 CFR 1.132-5 — Regulation on working condition fringes.
26 CFR 1.132-6 — Regulation on de minimis fringes.
IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits — Annual IRS guide to the tax treatment of employee fringe benefits, with 2026 figures.
IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans — IRS explanation of HSA rules and limits.
IRS Notice 2002-24 — IRS relief from the annual section 6039D return for certain plans.
General information, not legal or tax advice.
Quick Answers.
Short replies to what employers ask first about these sections. Each leads to a fuller guide.
Which Code section makes employer-paid health insurance tax-free?
Section 106(a). It provides that gross income does not include employer-provided coverage under an accident or health plan, and IRS Publication 15-B treats these benefits as generally excluded from wages.
What is the difference between sections 105(b) and 105(h)?
Subsection (b) of section 105 is the exclusion for medical care reimbursements. Subsection (h) is the guardrail: when a self-insured plan favors highly compensated individuals, their excess reimbursements become taxable.
Is a cafeteria plan the same as a benefits menu?
Not exactly. In the Code, a cafeteria plan is a written plan whose participants are all employees and who may choose among cash and qualified benefits.
Do employers still file anything under section 6039D?
Notice 2002-24 relieves employers with cafeteria, educational assistance and adoption assistance plans from the annual return, and any later reporting waits on further guidance. We could not confirm from a primary source whether regulations were finalized, so ask your tax adviser.
Where do HSAs come from in the Code?
Section 223 sets out the account, who may contribute, the yearly cap and the high deductible health plan test. Employer contributions are treated as employer-provided coverage under section 106(d).
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