Key Takeaways

  • A Medical Reimbursement Plan (MERP) allows employers to reimburse employees for qualified medical expenses on a tax-free basis.
  • MERPs offer flexibility in plan design, enabling employers to set reimbursement limits and choose which expenses are eligible.
  • These plans can work alongside group insurance, apply only to vision or dental care, or operate as standalone benefits.
  • Employers may benefit from cost savings, tax deductions, and the ability to offer customizable health benefits without committing to high insurance premiums.
  • Compliance with IRS rules, proper documentation, and plan design considerations are essential to maintain tax-advantaged status.
  • MERPs are not subject to ERISA in certain cases, but legal guidance is recommended for plan setup and maintenance.

Medical Reimbursement Plan: Everything You Need to Know

A Medical Reimbursement Plan, also known as a Medical Expense Reimbursement Plan or “MERP,” is substantially similar to a Health Reimbursement Arrangement or “HRA.” In fact, they are basically synonyms, with an HRA just being the more common phrase to use. However, unlike HRAs, there is no physical account linked to a MERP. Rather, the business will reimburse the employee for any health expenses after medical service has been completed. With various new benefit plans now available to health care providers, many businesses are quite interested in MERPs.

A Medical Expense Reimbursement Plan is just a way for employers to give their employees tax-free money that can be used only to pay medical expenses. Some details of this type of plan include:

  • Employees pay for their own doctor visits and medicine, and then the employer reimburses them.
  • Employers can contribute exactly the amount they want so the cost of a Medical Expense Reimbursement Plan doesn't increase from year to year.
  • Medical Expense Reimbursement Plans are incredibly flexible so it's difficult to say exactly how they should be used.

A Medical Expense Reimbursement Plan allows businesses to pay for part of their employees’ deductibles, copays, or co-insurance and any other qualified medical expense, tax-free. These plans are incredibly flexible and allow the business to come up with any sort of suitable arrangement. As a result, Medical Expense Reimbursement Plans are often associated with health care plans with higher deductibles. This will save the business and its employees on the amount of premiums while also continuing to offer a good quality health plan to the employee.

When deciding whether to opt for the Medical Expense Reimbursement Plan, the business will usually save a lot during the first year with the goal of stabilizing that amount in future years.

Advantages of a Medical Expense Reimbursement Plan (MERP)

There has been an enormous increase in the costs of health care in recent years. The category of people affected most by this increase is small businesses. It is very hard for a small business owner to cover his or her own costs of health care, let alone the health care costs for all of their employees.

Medical Expense Reimbursement Plans are appealing to small business owners because they are tax-exempt. Reimbursements are tax exempt, and any employer contributions are tax-deductible business expenses. Once the employer reimburses the employee, the claim can be filed.

Medical Expense Reimbursement Plans are also incredibly flexible in that the business can create any type of scheme it wants. The business owner is able to decide how much money will be available and how much of it will be disbursed to employees, as opposed to having a health insurance company dictate what the business can and can’t do.

How Medical Reimbursement Plans Work

Medical reimbursement plans allow employers to directly reimburse employees for eligible medical expenses after the employee has paid out-of-pocket. These reimbursements are typically tax-free for the employee and tax-deductible for the employer if structured correctly under IRS guidelines. Eligible expenses may include deductibles, copays, coinsurance, prescription costs, and in some cases, insurance premiums.

The process generally involves three key steps:

  1. The employee incurs an eligible medical expense and submits proof (such as a receipt or Explanation of Benefits).
  2. The employer reviews the claim to confirm it qualifies under the plan’s rules.
  3. The employer reimburses the employee up to the agreed-upon limit.

Employers can customize reimbursement limits per employee, plan year, or family size. Some plans also allow rollovers of unused benefits to future years.

MERPS With Group Insurance

A Medical Expense Reimbursement Plan with Group Insurance allows employers to self-insure a portion of their group insurance plan using pre-tax dollars which leads to big savings without any change in coverage. Employers can raise the deductible on the group plan and reimburse employees for the difference in the deductible.

Cost Control Strategies with MERPs

One of the main reasons employers choose a medical reimbursement plan is its cost-control flexibility. By combining a MERP with a high-deductible group insurance plan, employers can reduce premium costs while still helping employees manage out-of-pocket medical expenses.

Key cost-saving strategies include:

  • Raising the deductible on a group health plan while using the MERP to reimburse part or all of the deductible difference.
  • Setting annual caps on reimbursement amounts to predict costs more accurately.
  • Designing tiered reimbursement levels based on employee class or role, within nondiscrimination guidelines.

Employers maintain control over their budget and benefit design, allowing for year-over-year adjustments based on business needs.

MERPS for Vision or Dental

A Medical Expense Reimbursement Plan allows employers to reimburse only certain types of expenses. If an employer wants to offer a vision or dental plan without buying expensive insurance, they can offer a Medical Expense Reimbursement Plan to their employees that reimburse only for vision or dental expenses. Medical Expense Reimbursement Plans for vision or dental allow the employees to know that they're covered for basic expenses without costing the company large amounts of money on insurance premiums.

Common Eligible Expenses Under a Medical Reimbursement Plan

While plan flexibility allows employers to define which expenses qualify, common reimbursable costs often include:

  • Doctor visits, hospital services, and surgeries
  • Prescription medications
  • Mental health counseling
  • Physical therapy and rehabilitation services
  • Dental procedures (cleanings, fillings, crowns, etc.)
  • Vision care (exams, glasses, contact lenses)
  • Diagnostic tests such as MRIs and X-rays
  • Preventive care services

Employers should clearly outline eligible expenses in the plan document to ensure consistency and avoid misunderstandings.

MERPS as Stand-Alone Health Benefits Plans

A lot of people have negative opinions about individual insurance, but those are generally based on misconceptions or horror stories from a decade ago. Consider getting an agent who is knowledgeable to help you understand how a Medical Expense Reimbursement Plan or HRA works.

Money from a Medical Expense Reimbursement Plan can be used to pay for individual insurance premiums. Employers can offer only the Medical Expense Reimbursement Plan, and employees can use that money to buy their own individual policies rather than offering a group plan and a Medical Expense Reimbursement Plan. A Medical Expense Reimbursement Plan is fully deductible for the company.

Many companies use a Medical Expense Reimbursement Plan to cover ancillary health care services, such as vision or dental insurance, that is not usually covered by a group health care plan.

A Medical Expense Reimbursement Plan differs from a Flexible Spending Account in that funds aren’t set aside beforehand. There is no maximum or minimum amount by law, and with a Flexible Spending Account, you pay funds to an account and have to use these funds by the end of the year, otherwise the money disappears.

Legal and Compliance Considerations for MERPs

Proper compliance is critical to maintain the tax-advantaged status of a medical reimbursement plan. Employers should be aware of the following legal considerations:

  • IRS Section 105 Compliance: Reimbursements must be limited to qualified medical expenses as defined by IRS Publication 502.
  • Plan Documentation: A formal written plan document is required, detailing reimbursement rules, eligibility, and covered expenses.
  • Nondiscrimination Requirements: To avoid penalties, employers should ensure the plan does not favor highly compensated employees over others.
  • HIPAA Privacy Rules: Employers handling health information must comply with HIPAA regulations regarding confidentiality and data protection.
  • ERISA Implications: Some MERPs may fall under ERISA unless they qualify as “excepted benefits.” Employers should consult legal counsel to determine ERISA status and reporting obligations.

It is advisable to work with a qualified benefits consultant or attorney to ensure proper plan setup and ongoing compliance.

Frequently Asked Questions

  1. What is a medical reimbursement plan?
    A medical reimbursement plan allows employers to reimburse employees for certain medical expenses on a tax-free basis, offering flexible healthcare support outside traditional insurance.
  2. Are medical reimbursement plans the same as HRAs?
    Yes, medical reimbursement plans are often used interchangeably with Health Reimbursement Arrangements (HRAs). Both allow tax-free reimbursement for qualified medical expenses, though plan types and rules can vary.
  3. What expenses are eligible for reimbursement under a MERP?
    Eligible expenses typically include deductibles, copays, prescriptions, vision care, dental services, and in some cases, insurance premiums. The specific list should be defined in the plan document.
  4. Can small businesses use medical reimbursement plans?
    Yes, MERPs are particularly appealing to small businesses because they provide affordable, flexible healthcare benefits without the need for expensive group insurance plans.
  5. Do medical reimbursement plans require a formal written agreement?
    Yes, the IRS requires a written plan document outlining reimbursement policies, eligibility, and limits to ensure compliance and maintain tax advantages.

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