A Guide to MERP Options and Their Tax Benefits and Advantages

A Guide to MERP Options and Their Tax Benefits and Advantages

As healthcare prices continue to increase, employers need to find ways to lower these costs. A Medical Expense Reimbursement Plan (MERP) is a strategic tool companies use to help employees manage their out-of-pocket healthcare costs. MERP products are flexible and tax-advantaged, well-suited to small and large businesses and beneficial to both parties.

By understanding the basics of how these plans work, employers can design a benefit that aligns with their budget while giving employees peace of mind about managing medical expenses.

Understanding Medical Expense Reimbursement Plans

A MERP is an employer-provided benefit that allows businesses to reimburse employees for qualifying medical expenses. It helps employers navigate the expected 9% increase in healthcare costs per employee, which is on the horizon. These plans are often designed to help employees cover out-of-pocket healthcare costs not covered by insurance, such as copayments, deductibles or certain services.

It is a valuable tool for both employers and employees because it provides flexibility in managing healthcare costs while offering potential tax benefits. Key features include:

• Reimbursement-based system: Unlike traditional health insurance, a MERP does not provide direct coverage. Instead, it reimburses employees for eligible medical expenses they have already paid out of pocket. Employees simply submit proof of payment, such as invoices or receipts, for qualifying expenses.
• Employer-funded: A MERP product is solely funded by employers and requires no employee contributions. Employers set aside funds to cover reimbursements. The employer determines the maximum amount they are willing to reimburse per employee annually.

Compliance Considerations

When implementing a MERP, compliance with federal regulations is critical to avoid penalties and ensure the plan's tax-advantaged status. To stay compliant, employers must adhere to the following:

• The MERP cannot discriminate in favor of highly compensated employees.
• The MERP offer must integrate with other healthcare regulations to ensure it does not conflict with minimum essential coverage requirements.
• Employers must maintain thorough records of reimbursements and plan details.

How a MERP Works

At its core, a MERP is an arrangement that helps employees offset healthcare costs not covered by traditional insurance. Employers set aside funds to reimburse workers for eligible expenses, allowing the company to meet cost reduction and benefit improvement objectives.

Plan Design

All plans must comply with the Internal Revenue Service (IRS) regulations under Section 105. Employers establish a written plan outlining eligible expenses, annual reimbursement limits and rules for submitting claims. Common expenses include:

• Doctor visits
• First aid supplies
• Insurance premiums
• Dental and vision care
• Prescription medications

Employee Enrollment

Employees are enrolled in the MERP, which employers can offer as a stand-alone benefit or as a supplement to traditional health insurance. The employer then funds the HRA account, and the funds become available on the new plan's first start date.

Employees pay for eligible medical expenses upfront and retain the documentation. They submit these claims through a dedicated platform by providing receipts or Explanation of Benefits (EOB) forms from insurers.

Reimbursement Process

Employers review claims to ensure they meet the plan guidelines. Approved claims are reimbursed directly to employees, often through direct deposit or check. Employers may adjust the reimbursement limits or eligible expenses each year based on budget and employee needs.

MERP Medical Tax Benefits for Employers

Employers can enjoy significant tax advantages when they use a MERP to reduce healthcare benefits costs. Tax-specific benefits include:

• Deductible reimbursements: Employers can deduct the amount they reimburse employees as a business expense under Section 162 of the IRS.
• Tax reduction: By deducting these reimbursements, employers lower their taxable income, which can significantly reduce overall tax liability.
• Payroll exemptions: Medical expense reimbursements provided through a MERP are not subject to Social Security or unemployment taxes.
• Lower contributions: Since reimbursements are excluded from payroll taxes, employers can reduce the amount they pay in payroll tax contributions.

Cost-Reduction Techniques for Employers

MERP packages let employers set reimbursement limits, which allows them to control healthcare costs more effectively than traditional group health insurance. MERP packages are not affected by annual premium hikes, which also offers stability in budgeting. Employers can use these techniques to maximize their cost-efficiency:

• Targeted benefits: Tailor the MERP to cover only specific expenses, such as high deductibles or non-covered services, to focus funds where they are needed the most.
• Integrated plans: Use a MERP program alongside high-deductible health plans (HDHP) to reduce overall insurance premiums while still supporting employees with reimbursements.
• Employee education: Encourage employees to use the MERP for preventive care or cost-effective services, which may reduce claims over time.
• Unused funds: Unlike flexible spending accounts (FSA), unspent reimbursement funds remain with the employer, reducing waste.

Tax Benefits of MERP for Employees

A MERP program can offer employees substantial tax relief. Employees do not pay Social Security or Medicare taxes on MERP reimbursements, which further increases the value of this benefit.

Is MERP Income Taxed?

MERP reimbursements are not considered taxable income for employees, provided the plan complies with IRS guidelines. To maintain this tax-free status, they need to meet these conditions:

• Expense classification: Only expenses defined as "medical expenses" under IRS Section 213(d) qualify for reimbursement.
• Proper documents: Employees must provide invoices, receipts or other proof of payment when submitting claims.
• Regulatory compliance: The MERP must comply with nondiscrimination rules and not favor highly compensated employees.

Key Advantages of MERP Programs

MERP plans provide a good combination of flexibility, cost savings and employee-focused benefits, making them an appealing option for many employers. Unlike traditional health benefit programs, they offer unparalleled customization and control over healthcare spending while delivering financial relief to employees. Here are some of those key advantages:

• Cost control: Employers set the reimbursement cap and eligible expenses, gaining greater control over healthcare costs.
• Employee satisfaction: Helps reduce employees' financial burden for medical expenses and improve company morale.
• Tax benefits: Provides tax savings for both employers and employees.
• Customization: Plans are tailored to meet each organization's needs, allowing them to achieve health benefit goals.
• Retention and productivity: A MERP program enhances benefits packages, attracting top talent and supporting a healthier, more productive workforce.
• Regulatory compliance: MERP programs adhere to regulations like the IRS and the Employee Retirement Income Security Act (ERISA), ensuring a tax-favored status.

Comparing MERP Programs to Other Health Benefit Options

When designing a health benefits package, employers have several options to consider, including Health Reimbursement Arrangements (HRA), Health Savings Accounts (HSA) and FSA options. While each of these programs has unique advantages, MERP packages offer distinct features that set them apart. By understanding how these compare to other health benefit options, employers can make informed decisions that align with their organizational goals and employee needs.

MERP vs. Traditional Health Plans

A MERP plan can be offered alongside a traditional healthcare plan to give employees maximum health benefits. Separately, this is how traditional plans differ from MERP programs:

• Flexibility: Group insurance is limited to the coverage and structure defined by insurance carriers.
• Cost control: Health insurance premiums are subject to annual increases, which may outpace inflation.
• Employee costs: Employees still face high deductibles, copayments or non-covered services with group insurance.

However, integrating a MERP with group health insurance reduces administrative burdens, as the MERP administrator handles verification and approvals. These plans give employees extra financial protection, as they can seek the medical services they need without concern over additional expenses.

MERP vs. HRA

An HRA is closely related to MERP programs but has broader applications, including reimbursing premiums or supplementing other benefits. These plans can integrate with individual insurance coverage like an Individual Coverage Health Reimbursement Arrangement (ICHRA) or focus on limited purposes, such as dental or vision expenses.

MERP vs. HSA and FSA Programs

Employers and employees fund HSA programs, which are often tied to an HDHP. Employees own the HSA account and can carry balances forward indefinitely, even after leaving the company. An HSA also stands out as these funds can be used for a broad range of IRS-approved medical expenses. All HSA contributions are either pretax or tax-deductible, and growth and withdrawals for qualified expenses are tax-free.

Employees fund FSA programs with pretax payroll deductions and optional employer contributions. Any unspent funds at the end of an FSA plan year may be forfeited unless the employer allows a rollover or grace period. These plans are also generally used for a broader range of medical expenses, but the IRS limits these with annual contribution caps.

Types of MERP Packages

MERP products come in several variations to suit different business sizes, budgets and goals. These packages can be tailored to meet the unique needs of employers and employees alike. Understanding the various MERP products ensures businesses can choose the best fit for their workforce, while comparisons with other health benefit options highlight their unique strengths.

1. Stand-Alone MERP

Employers who do not offer group health insurance may offer stand-alone MERP products. These plans are ideal for small businesses or those transitioning away from group health insurance plans. Employees are reimbursed for their individual insurance premiums and other expenses. These plans must comply with federal regulations, such as the Affordable Care Act (ACA).

2. Integrated MERP

This option is designed to supplement a group health insurance plan by covering expenses not fully reimbursed by insurance, such as high deductibles or copayments. These packages are suited to employers looking to manage rising insurance costs while maintaining comprehensive employee coverage. They give employees lower out-of-pocket costs while allowing employers to keep premiums low with high-deductible plans.

3. Qualified Small Employer Health Reimbursement Arrangements

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a specific type of MERP for businesses with fewer than 50 full-time employees. This plan allows reimbursement of the employee's chosen insurance premiums and medical expenses with capped annual limits set by the IRS. It is ideal for small businesses that cannot afford group health insurance.

4. Individual Coverage Health Reimbursement Arrangements

Similar to QSEHRA products, an ICRHA enables employers to reimburse employees for individual insurance policies or medical expenses. These packages have no annual contribution limit, and employees can opt out if they prefer traditional group health coverage instead. This MERP program may be well suited for larger businesses looking for an alternative to group health insurance.

How The Difference Card Can Help

At The Difference Card, we specialize in designing and administering MERP offerings to help businesses achieve their health plan goals. When you partner with us, you can enjoy an easy-to-use mobile app and member portal, claims processing within two business days, and more. We enhance traditional MERP offerings with added automation, flexibility and compliance support through:

• Custom plan design: Employers can switch insurance carriers and adjust health plans without losing MERP benefits.
• Savings and reporting: We provide detailed utilization data, track cost savings and offer reinsurance options for guaranteed savings.
• Streamlined administration: Auto-substantiation via integrated debit cards that simplify claims.
• Dedicated support: Each client gets an account management team to guide implementation and ensure success, supported by multilingual educational materials.
• Compliance assurance: We deliver plan documents, testing and compliance tools to protect employers from regulatory risks.

Comprehensive Solutions

Beyond MERP services, we offer a full suite of benefits, including HRA, HSA, FSA, commuter accounts, dental plans and more. With this ability to stack options onto one card, we simplify benefits management while delivering tax advantages and tailored solutions.

Claim Approval Process

When employees incur medical expenses, they submit claims with supporting documents. One of our plan administrators reviews the claims to ensure compliance with plan guidelines and reimburses the approved expenses. For added convenience, employees can use a Difference Card Mastercard to pay for eligible expenses directly at the point of service.

Improve Employee Benefits Without Increasing Costs

Whether integrated with insurance or offered as a stand-alone benefit, MERP products can be a powerful tool in a comprehensive benefits package. They create a win-win scenario for employers and employees regarding tax savings and control over healthcare costs. A MERP can leverage these tax benefits and implement cost-reduction strategies.

Let The Difference Card transform your benefits strategy. With over 20 years of offering cost-saving healthcare solutions, we guarantee health insurance savings without reducing your employee benefits. We have helped clients save over $1.5 billion and counting. Whether you are an employer looking for MERP offers or an insurance broker, our team is ready to assist.

Contact us today for MERP solutions and additional offerings to create a comprehensive, cost-effective plan that meets your organization's unique needs.