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How do Medical Expense Reimbursement Plans (MERPs) work?

Written by: Gabrielle Smith
March 8, 2021 at 8:25 AM

A lot of new health benefits plans have become available to employers in the last few years. Many employers are particularly interested in Medical Expense Reimbursement Plans (MERPs), also known as Medical Reimbursement Accounts (MRAs).

With an MERP, organizations typically offer an allowance of tax-free money instead of a traditional benefit like group health insurance; although some MERPS like an individual coverage HRA (ICHRA) or a group coverage HRA (GCHRA) can work alongside existing group plans. Then, employees purchase the health care products and services they want, potentially including individual health insurance, and the organization 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 organization.

What is an MERP?

MERP stands for Medical Expense Reimbursement Plan. An MERP is just what it sounds like—any plan or arrangement where an organization reimburses employees 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.

An 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 qualified medical expenses.

Normally, they follow a five-step process:

1. Employers set allowance amounts

With an MERP, employers set a monthly allowance amount for each employee. That allowance represents the maximum amount an employer will reimburse the employee for their health care expenses each month.

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, and the rules established by the employer, employees may also purchase individual health insurance policies.

3. Employees submit proof of expense

After making their purchase, employees submit proof in the form of documentation. This document could be a receipt or explanation of benefits, but it must include three items:

  1. The date the expense was incurred
  2. A description of the product or service
  3. The employee's name

4. Employers review employee documentation

Employers review employee documentation to ensure the expense is qualified for reimbursement and contains all necessary information. If any item is missing, they must inform the employee and allow them to provide additional information.

5. Employers reimburse employees

Finally, if everything is in order, the employer reimburses the employee up to their allowance amount.

To comply with federal regulations while administering an 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 our article, "How Does an HRA Work?"

What types of MERPs are there?

The definition of an MERP is relatively broad, so there are several different types of MERPs that fall within this umbrella term. 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.

The qualified small employer HRA (QSEHRA) is an example of a stand-alone MERP that’s specifically designed for employers with less than 50 full-time employees.

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 group HRA.

MERPs with an individual plan

The individual coverage HRA (ICHRA) is another MERP type that can function as either a stand-alone benefit or as a separate option in an organization’s health benefits program, alongside group health insurance.

Here, employers can offer a group health insurance policy to one class of employees and an ICHRA to another class of employees who choose their own individual coverage. For example, full-time employees may be offered group health insurance while part-time employees are offered the ICHRA.

MERPs for vision and dental

MERPs allow employers to only reimburse certain types of expenses. If an employer wants to offer a vision or dental plan without buying expensive insurance, they can offer an MERP to their employees that only reimburses for vision and/or dental expenses.

Conclusion

With the flexibility of an MERP, employees are empowered to purchase the health coverage of their choosing and can rest easy knowing their medical expenses are covered. No matter your organization’s size, budget, or insurance status, there is an option to meet every need.

This article was originally published on April 17, 2014. It was last updated March 8, 2021.

Topics: Health Reimbursement Arrangement

Additional Resources

New to HRAs? Learn which is best for you in our comparison chart.
See what makes HRAs different from HSAs and FSAs in our comparison chart.

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