A Medical Expense Reimbursement Plan (MERP) is an easy, tax-free means for employers to assist employees with medical expenses. Rather than providing conventional health insurance, companies provide employees with a specified amount of money to use on what suits them best—be it insurance, doctor’s visits, prescriptions, dental care, or eye care.
It’s flexible, easy to manage, and helps employees save money and reduce stress. They pay for their healthcare needs, submit proof, and get reimbursed—just like that! Employers can use MERPs alone or alongside group plans, making them a great option for companies of all sizes.
If you’re looking for a cost-effective and employee-friendly way to offer healthcare benefits, a MERP might be the perfect fit!
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Are you having a hard time determining health benefits for your workers? Do you get confused by words such as “group health insurance”? A Medical Expense Reimbursement Plan (MERP) could be exactly what you require!
So, on a simple note, a MERP is a method through which employers can enable employees to cover their medical expenditure without paying additional tax. Rather than a traditional group plan, you provide workers with a sum of money and let them decide how to use it for healthcare. This could be individual insurance, dental or vision care, for example. It’s an open-ended approach to covering your workers’ health.
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Let’s take a more detailed look at how MERPs function and whether they are good for your business.
What is a MERP?
A Medical Expense Reimbursement Plan (MERP) is an IRS-sanctioned method by which organizations can assist employees in paying medical expenses. Under a MERP, businesses reimburse employees for out-of-pocket medical bills—either for themselves or their dependents. When properly implemented, these reimbursements are tax-free to employees 100%.
How a MERP Works
A MERP can be applied in two ways:
- Along with a group health insurance policy – This pays additional medical expenses not covered fully by insurance.
- As the primary health benefits plan – A few employers provide a MERP rather than standard group health insurance.
How a MERP is Different
A MERP does not qualify as a cafeteria plan (Section 125) or flexible spending account (FSA). Rather, it is a Section 105 tax code offering, which is much like a Health Reimbursement Arrangement (HRA).
Advantages of a MERP
- Saves employees money – All reimbursed expenses are tax-free.
- Reduces financial stress – Employees do not have to bear all medical expenses out-of-pocket.
- Adaptable for companies – Companies can customize the plan according to their requirements.
With a MERP, companies give significant financial assistance to employees, enabling them to receive better and more affordable healthcare.
How Do MERPs Work?
A Medical Expense Reimbursement Plan (MERP) enables employers to provide their employees with tax-free funds to assist in paying for medical expenses. Employees, though, can only utilize this money for qualified medical expenses as outlined by the IRS.
- Employers Set Allowance Amounts: Employers determine how much they will pay each employee each month for healthcare costs. This monthly stipend is the most that employees can be reimbursed for their healthcare costs.
- Employees Purchase Healthcare Items or Services: Employees pay out of their own pockets to purchase healthcare products or services that suit them. This may be doctor visits, prescriptions, or even a personal health insurance policy, depending on the rules of the MERP.
- Employees Submit Proof of the Expense: Once an employee has made a purchase, they are required to present proof of their eligible expenses. This may be a receipt, an explanation of benefits, or any other acceptable documentation.
The proof must contain the following in order to be accepted:
- The date the expense was incurred (by the employee or his/her dependent)
- A description of the product or service
- The name of the employee
- The total amount of the item or service
- Employers Review Employee Documentation: After submission, the employer verifies the documents to ensure that the expense is eligible for reimbursement. If there are missing details, they inform the employee and ask for more information.
- Employers Reimburse Employees: If all is well, the employer reimburses the employee to their approved allowance.
After Federal Compliance
To comply with federal requirements, employers need to have Section 105 plan documents describing the terms of their Medical Expense Reimbursement Plan (MERP) and have the plan administered properly. Due to these demands, most employers hire a third-party or software vendor to administer their MERP.
What Expenses Can a MERP Reimburse?
A Medical Expense Reimbursement Plan (MERP) can reimburse any medical expense the IRS deems eligible, such as premiums for individual health insurance policies. It can also reimburse expenses qualified under the CARES Act. Yet, businesses have the freedom to determine what expenses they will reimburse.
Reimbursable Expenses:
- Health insurance premiums
- Dental work (check-ups, procedures, etc.)
- Vision work (eye exams, glasses, contacts)
- Hospital stays and treatments
- Prescription medication
- Health plan deductibles
The actual costs reimbursed vary by type of plan offered by an employer. You can go through the IRS Publication 502 for the full list of eligible expenses.
What Types of MERPs Are There?
A Medical Expense Reimbursement Plan (MERP) is a general term that refers to a range of employer-sponsored healthcare reimbursement plans. Employers may employ MERPs in several different manners to offer medical benefits in a less expensive way than traditional group insurance.
- Stand-alone MERP or HRA:
An individual MERP, or an individual Health Reimbursement Arrangement (HRA), enables companies to reimburse their workers for self-purchased individual health insurance coverage rather than purchasing a standard group plan. It provides companies with a budget–friendly method of providing healthcare benefits that doesn’t impose the weight of increasing insurance charges.
A QSEHRA is a type of stand-alone MERP with the specific application for small organizations with fewer than 50 FTEs. Under a QSEHRA, employers reimburse employees for the cost of assorted healthcare expenses such as health insurance premiums, physician services, and prescription medication costs.
MERPs provide flexibility because businesses can custom-fit healthcare coverage to the specific needs of the employees while controlling expenses.
- MERPs with a Group Plan:
Employers also utilize a Medical Expense Reimbursement Plan (MERP) in conjunction with a group health plan, commonly a high-deductible health plan (HDHP).
With this arrangement, the employer raises the deductible of the group health plan and subsequently reimburses workers for the balance. This enables companies to self-fund some of their insurance expenses in pre-tax dollars, which results in tremendous savings with no reduction in employee coverage levels.
Common Names for This MERP Type:
- Group Coverage HRA (GCHRA)
- Integrated HRA
- Deductible HRA
- Traditional HRA
- Group HRA
The strategy assists employers in reducing their insurance costs while providing employees with the medical cover they require.
- MERPs with an Individual Plan:
An Individual Coverage HRA (ICHRA) is a form of Medical Expense Reimbursement Plan (MERP) that can be provided by employers in two forms:
- As a separate benefit
- As an optional benefit in conjunction with a group health insurance plan
How ICHRA Operates-
Employers can offer group health insurance to a group of employees and an ICHRA to another group. For instance:
- Full-time workers can be given traditional group health insurance.
- Part-time workers can receive an ICHRA to buy their own individual health coverage.
Key Rule: Workers in the same classification may not be offered a choice between a group plan and an ICHRA.
This model is flexible enough to allow companies to tailor benefits while providing workers with the protection they require.MERPs for Vision and Dental
Employers may create Medical Expense Reimbursement Plans (MERPs) to pay for particular medical expenses.
For instance, suppose a company wishes to provide dental or vision benefits without the expense of conventional insurance. A MERP can be established to pay for vision and/or dental expenses.
Health Stipends
In addition to the standard group health coverage, stipends present yet another mechanism for assisting employees with medical expenses. Similar to Medical Expense Reimbursement Plans (MERPs), stipends enable employers to reimburse employees for healthcare outlays. With the stipend, though, being not a formal benefit, employers can more easily determine what expenses to reimburse beyond what’s in IRS Publication 502.
Key Differences Between Health Stipends and MERPs
- Taxation: In contrast to MERPs, stipends are taxable to both the employer and the employee. Employers are required to report stipend payments as income on the W-2 forms of employees.
- Flexibility: Employers are able to provide stipends to 1099 contractors and foreign employees, which makes it an effective resource for hiring and retaining employees.
- Premium Tax Credits: Employees who receive Advance Premium Tax Credits (APTC) are able to use both their credits and their stipend allowance.
Limitations of Health Stipends
Though stipends provide versatility, they fall short of meeting the requirements for the Affordable Care Act (ACA) in large employers that have 50 or more full-time employees (FTEs). Large companies have to provide compliant health benefits such as a MERP or an HRA so that they may avoid penalties.
Conclusion
Medical Expense Reimbursement Plan (MERP) is an excellent strategy for helping financially your workers as well as empowering them with a flexibility of obtaining healthcare coverage with choices they may have the preference for. By offering MERP, the employee gets reimbursed for approved medical costs and for those health treatments they consider better meeting their special requirements.
To learn more about how MERPs work and explore other healthcare reimbursement solutions, visit here for expert insights and guidance.
Regardless of the size of your company, budget, or current insurance arrangement, there is a MERP solution that will suit you. If you are thinking of providing this benefit to your staff, professional solutions are at hand to assist you in establishing and administering a MERP with minimal hassle.
