What Is a MERP? Medical Expense Reimbursement Plans Explained
A medical expense reimbursement plan, or MERP, lets an employer pay employees back for medical costs their insurance does not cover, like deductibles and copays. Here is how it works, who it fits, and what to check before you set one up.
The Short Version
A MERP is a benefit where you, as the employer, pay employees back for eligible medical costs that their health insurance does not cover, like deductibles, copays, and coinsurance. You decide how much is available, and employees submit their expenses to be reimbursed up to that amount. You may also hear it called a health reimbursement arrangement, or HRA, which is the term the IRS uses.
A MERP is meant to work alongside a group health plan, not replace one. Federal rules treat reimbursement plans as group health plans, and on their own they generally do not meet the requirements that apply to them. The rest of this guide covers how a MERP works, what your employees experience, and what to check before you set one up.
In one sentence
A MERP reimburses employees for the medical costs their insurance leaves behind, and it works best as a partner to a group health plan, not a substitute for one.
How a MERP Works, Step by Step
A MERP runs on a simple rhythm. Here is what it looks like from the day you set it up to the day an employee gets paid back.
Step 1
Decide who is covered and how much to offer
You choose which employees are eligible and how much is available each plan year. Most employers offer the same amount to everyone in a group, because plans that favor highly paid employees can make their reimbursements taxable.
Step 2
Pair it with a group health plan
A MERP is built to work alongside your group coverage, picking up costs like deductibles and copays. Because federal rules treat reimbursement plans as group health plans, how the two fit together matters.
Step 3
Explain it to your team
Employees need to know what is covered, how to submit an expense, and any deadlines. A short, plain-language explanation up front saves a lot of questions later.
Step 4
Employees pay, submit, and get reimbursed
When an employee has an eligible expense, they pay it, submit it, and you pay them back up to the plan amount. Reimbursements for qualified medical expenses are generally tax-free for the employee, and a plan can allow unused amounts to carry forward.
The details, like which expenses are covered, how much to offer, and whether unused amounts carry over, are worth talking through with an advisor before your plan year begins.
What Your Employees Experience
For employees, a MERP feels simple. They keep their regular coverage, and the MERP helps with the out-of-pocket costs that come with it.
They pay, then submit
When an eligible expense comes up, like a deductible or a copay, the employee pays it as usual and sends in the receipt or statement through the process you set up.
They get paid back
Once the expense is approved, the employee is reimbursed up to the amount available under your plan. Reimbursements for qualified medical expenses are generally not taxable to the employee when the plan follows IRS rules.
They know what is left
A well-run plan makes it easy to see how much of the amount remains. If your plan lets unused dollars carry forward, what is left at year end can roll into the next year.
What counts as an eligible expense follows the IRS definition of qualified medical expenses, and your plan document spells out the details.
When a MERP Makes Sense, and When It Might Not
A MERP is not the right tool for every business. Here is a quick way to tell whether it is worth a closer look.
It is often a good fit when
It may not be the right tool when
If what you really want is to help employees buy their own coverage instead of offering a group plan, read our guide to how an ICHRA works or our comparison of ICHRA vs. group health insurance.
Common Questions About MERPs
What is a MERP?
A medical expense reimbursement plan, or MERP, is a benefit where an employer pays employees back for eligible medical costs their insurance does not cover, such as deductibles and copays. You may also hear it called a health reimbursement arrangement, or HRA, which is the term the IRS uses for employer-funded plans that reimburse medical expenses.
Does a MERP have to go with a group health plan?
In practice, yes. Federal agencies treat reimbursement arrangements as group health plans, and on their own they generally fail to meet the ACA rules that apply to group health plans. Pairing a MERP with other group coverage that the employee is enrolled in is the usual way to meet those rules. A limited version, called an excepted benefit HRA, has its own conditions, including that the employer offers other group health coverage and that the yearly amount stays under a cap.
Are MERP reimbursements tax-free for employees?
Reimbursements for qualified medical expenses are generally tax-free to the employee, and the plan has to be funded entirely by the employer, not through salary reductions. A self-insured plan that favors highly compensated employees can make their reimbursements taxable, so how the plan is designed matters.
How is a MERP different from an ICHRA?
A MERP works alongside a group health plan to cover costs like deductibles and copays. An ICHRA reimburses employees for individual health insurance they buy themselves, and an employer generally cannot offer an ICHRA and a traditional group plan to the same class of employees.
Can employees with an HSA also use a MERP?
Often not at the same time. Someone covered by a high-deductible health plan and a MERP that reimburses qualified medical expenses generally cannot contribute to a health savings account. Limited-purpose and suspended versions are exceptions, so check before you design a plan if your employees use HSAs.
Can a business owner be covered by a MERP?
Often not in the same way as employees. The IRS says self-employed people are not eligible for HRAs, and a 2% shareholder of an S corporation is not treated as an employee for the tax exclusion. Owners in these situations should get advice before including themselves.
Can unused MERP dollars roll over?
That depends on how the plan is written. The IRS says unused amounts in an HRA can be carried forward to later years, and your plan document sets the rules for whether that happens and how much.
What rules apply to a MERP?
A MERP is a group health plan, so federal rules can apply, including the ACA's market reforms. HIPAA privacy rules apply to a plan that has 50 or more participants or is administered by someone other than the employer. Because the details depend on how the plan is built, it is worth setting one up with guidance.
This FAQ is general information about how these plans work, not tax or legal advice. Rules can change and every situation is different, so check with a qualified tax or benefits advisor before you set up a plan.
Thinking About a MERP for Your Business?
Tell us about your team and your current coverage, and we will help you work out whether a MERP fits and how it would sit alongside your plan.
Compliance & References
Federal Guidance and Regulations
The points in this guide come from these federal sources:
Key Requirements at a Glance
Annual Limits and Updates
Some dollar limits that apply to these plans, including the annual limit for excepted benefit HRAs, are adjusted each year. Check the latest figures before you set up or change a plan.
This content is provided for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor about your specific situation.
Disclosures
We are compensated by the insurance carriers for policies you choose through us. There is no direct cost to you. Compensation may vary by carrier and product. Information on this page is for educational purposes and does not constitute legal, tax, or accounting advice. Please consult your professional advisors about your specific situation. Tax treatment of MERP reimbursements can vary by employer and employee. We are licensed to advise clients in Pennsylvania, New Jersey, and Delaware. Contact us to confirm availability in other states.
