Small Business Employee Benefits and HR Blog

How do Medical Expense Reimbursement Plans (MERPs) Work?

April 17, 2014
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A lot of new health benefits plans have become available to employers in the last few years. Many employers are particularly interested in MERPs or "Medical Expense Reimbursement Plans". 

With a MERP, businesses offer an allowance of tax-free money instead of a traditional benefit like group health insurance. Employees purchase the health care products and services they want, potentially including individual health insurance, and the business reimburses them up to their allowance.

In this post, we'll explore how a MERP works as well as various types of MERPs you may consider implementing for your business.

Let's get started.

What is a MERP?

MERP stands for Medical Expense Reimbursement Plan. A MERP is any plan or arrangement under which a business reimburses an employee for out-of-pocket medical expenses incurred by employees or their dependents. If administered correctly, all reimbursements are paid to the employee 100% tax-free. 

A MERP is not a Section 125 Plan, Cafeteria Plan, or Flexible Spending Account. Rather, it is a Section 105 Plan, like a health reimbursement arrangement (HRA).

How do MERPs Work?

MERPs are a way for employers to give tax-free money to their employees which can only be used to pay for medical expenses. Normally, they follow a five-step process:

  1. Employers set allowance amounts. With a MERP, employers set a monthly allowance amount for each employee. It represents the maximum amount for which the employer will reimburse the employee for their health care expenses.
  2. Employees purchase health care. Employees purchase the health care products and services they want with their own money. Depending on the type of MERP used, employees may also purchase individual health insurance policies.
  3. Employees submit proof of expense. After incurring an expense, employees submit proof in the form of documentation. This document could be a receipt or explanation of benefits, but it must include three items: the date the expense was incurred, a description of the product or service, and the employee's name.
  4. Employers review employee documentation. Employers review employee documentation to ensure the expenses is qualified for reimbursement and contains all necessary information. If any item is missing, they must inform employees and allow them to provide additional information.
  5. Employers reimburse employees. If everything is in order, the employer reimburses the employee up to their allowance amount.

To comply with federal regulations while administering a MERP, the employer is required to have Section 105 Plan Documents that outline the terms of the MERP and administer the plan in a certain way. For these reasons, nearly all employers use a third-party or software provider to set up and administer the MERP.

For more information, see "How Does an HRA Work?"

What Types of MERPs are There?

As mentioned, a MERP is any Section 105 plan where the employer reimburses employees for out-of-pocket medical expenses. Within this "umbrella" term there are several different types of MERPs. Here are a few common ways employers use MERPs, and what they are commonly called.

Stand-alone MERP

A stand-alone MERP, or stand-alone HRA, is offered by the employer as a way to reimburse employees for individual (personal) health insurance policies. An employer offers the MERP instead of a group plan. This allows employers to offer great benefits without dealing with the sky-rocketing costs and constant headaches of insurance.

MERPs with a Group Plan

Another way employers are using MERPs is paired with a group health plan, usually a high-deductible health plan. With this type of MERP, employers usually 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 which leads to big savings without any change in coverage.

MERPs paired with a group plan are commonly called group coverage HRAs, Deductible HRAs, or GroupHRA.

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 visions and/or dental expenses.

What questions do you have about how MERPs work? Leave a comment below and we'll help answer it.

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