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Information & Resources

Making Notes

Getting the Most out of Your Insurance Plan

A medical expense reimbursement plan (MERP) is an employee fringe benefit which can provide your employees with significant tax breaks and savings.

Under this plan, eligible employees are reimbursed by the company for out-of-pocket medical expenses. The plan provides tax-free benefit so that medical expenses can be paid with "before tax" dollars. An additional fringe benefit is the option to establish everything under the umbrella of a Cafeteria Plan.

With MERPs, the employer pays reimbursement costs; for Cafeteria Plans, the employee covers costs through salary reductions.

Your plan must meet two important tests under the rules of Internal Revenue Code Section 105 before achieving non-discriminatory and tax-free fringe benefit status for eligible employees.

1) Benefits Test:

This requires all benefits provided to Highly Compensated Employees (HCEs) and their dependents be duplicated for all other employees and their dependents. Limits set for the plan must be uniform for all participants and dependents, and may not be modified to age or length of service. In short, a plan may not discriminate in terms of benefits offered.

2) Eligibility Test:

The plan can not discriminate as to eligibility.

The plan must pass at least one of these three requirements:

  • At least 70% of all non-excludable employees must participate in the health plan.

  • At least 70% of all non-excludable employees are eligible to participate in the plan, with at least 80% of all eligible employees participating.

  • The plan must not discriminate in favor of HCEs (per review by the IRS) and be offered to a "fair cross-section" of employees.

If the plan fails the eligibility test, then at least a portion of benefits provided to HCEs will be treated as taxable income.

Filing Requirements:
There are none; self-insured health plans are "required" to file annual returns with the IRS and in some cases, with the Department of Labor (companies with 100+ employees). However, the IRS suspended the filing requirement until it further notice. This was in 1990 and the policy has yet to be updated.

How it works:
How can a company raise the policy deductible without passing additional out-of-pocket expenses to employees?

Setting up a MERP can cover expenses below the deductible. The company can safely raise the deductible, dramatically lowering premiums without cost to employees. Both company and employees save money.

With a Medical Expense Reimbursement Plan, employers agree to pay part of their employee medical expenses.

The employer offers one deductible to the employees, and contracts with the insurance carrier for a higher deductible. The difference between those two deductibles is the figure which is self-insured.

MERPS with Group Insurance:
You basically raise the deductible on the group plan and reimburse employees for the difference in the deductible. This effectively allows employers to self-insure a portion of their group insurance plan using pre-tax dollars leading to large savings without change in coverage.

MERPS for Vision/Dental:
MERPS allow employers to only reimburse certain types of expenses. If an employer wants to offer a vision/dental plan without buying expensive insurance, they can offer a MERP to their employees that only reimburses for vision and/or dental expenses. This allows the employees to know that they're covered for basic expenses without huge premiums.

Innovations In Employer Benefits:
As we enter the 2020s, we have partnered with The New Credit Company to offer the first-ever long-term concierge credit services for employee benefit plans. Financial wellness is impossible with anything less than great credit, and one of the major trends in the benefits industry. The team of consumer credit advocates at New Credit can give brokers a strategic advantage in this competitive market.

Packages: Information
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