If an employer provides a tax-free reimbursement to employees of $1,500 a year for unreimburesed medical expenses but does not do so in a Sect. 125 or 105 plan, is this illegal? For example, the employee submits claims to the employer (up to $1,500/year) and the employer cuts the employee a check for the claim amount. Seems to me this should be run as a formal cafetria plan with a document, 5500, etc...

James,

You are correct in your assumption that an employer has to adopt a plan in order to reimburse employees on a tax-free basis. A 105(h) plan would sound like the appropriate type of plan since there does not seem to be employee contributions required to obtain the benefits. The plan should be in writing, reimburse employees and their dependents for "allowable" expenses, follow the nondiscrimination rules under 105(h)and not reimburse for expenses deducted by employees on their tax returns. Without following the rules the reimbursements could be construed as taxable income to the employees. The employer could be fined for not having done the proper tax witholding on those payments.It is far easier and safer to follow the rules.