The MERP Plan, A Strategy to Consider

There are many employer benefit funding options that maintain pre-tax status with the IRS. One common plan is referred to as an HRA, or Health Reimbursement Arrangement. Some employers allow their workers to direct payroll deductions into an FSA to cover certain medical expenses on a pre-tax basis. Others offer to purchase transit passes on behalf of employees and take advantage of funding accounts to capture tax advantages for doing so.

A lesser well-known option is the Medical Expense Reimbursement Plan or MERP. A MERP is not part of a standard benefits offering, but a MERP can be a valuable tool to achieve various employer health plan objectives, such as benefit improvement, cost reduction and tax savings.

In contrast, the most succinct and readable definition is as follows: “MERPs are employer-funded arrangements that reimburse qualified medical expenses and are typically offered in conjunction with high deductible insurance policies.”

We operate in a market where cost-advantaged alternatives to traditional medical insurance programs abound. The MERP is an option among a solution set that includes pooled arrangements such as PEOs and captives, an expanding spectrum of permissible HRA types, Archer MSAs and 100% self-insurance transferring all risk from carrier to employer. MERPs can be thought of as a type of — or step toward — self-insurance.

MERPs With a Group Plan

In contracts, a medical reimbursement program designed to pair with an employer-provided insurance plan is referred to as a Group Coverage MERP. Within this category, a common example is purchasing an HDHP renewal option which raises the deductible considerably while layering in a MERP to minimize the impact of this change to the employee. This is often called a Deductible MERP.

Employer Sets Allowance Amounts

The employer will begin by specifying how the reimbursement should be paid out. A very simple reimbursement structure would allocate a flat dollar maximum amount to be spent by the employee and eligible dependents on any items on the IRS 213-d schedule within a calendar year.

This monthly allowance reflects the total amount an employer can reimburse the employee for healthcare expenses.

A more complicated reimbursement structure could allocate certain dollar amounts or percentages to specific procedures or categories. Once defined and implemented, typically with an outside administrator like The Difference Card, the plan becomes available for employees.

Employee Submits Proof of Expense

Following the purchase of healthcare, the employee must submit proof of expense to be reimbursed. Any eligible document — like a receipt or explanation of benefits — must have the payment date, a description of the purchased service or product, and the employee’s name.

Employer Reimburses Employee

Finally, reimbursement is issued to the employee for the appropriate dollar amount. Coupled with the prevalence of debit cards, the amount of administrative work required on the end user’s part has decreased considerably over the years. The timeline to issue benefits has been reduced, and reimbursements can occur consistently within 48 hours.

Benefits of a MERP

1. Control of Funds

At year-end, any unspent funds stay with the employer and are available for next year’s benefits programs. This contrasts with a traditional insurance plan wherein the insurance carrier retains premium dollars. The MERP allocates funds spent toward eligible expenses only if they are incurred rather than representing an obligation to pay. So, for the same cost, employers can provide benefits that will be fairly accessed only by those who need them.

2. Flexibility

A set menu of plan design offerings from a selected carrier often constrains smaller employer groups. By integrating a MERP, employers of all sizes can design their own plan offerings and easily make changes from year to year.

3. Partial Self-Insurance

MERPs are commonly promoted as a way for a group to try out self-funding part of their medical benefit while limiting risk. Partial self-insurance can reduce an employer’s tax liability and lower the overall cost of offering healthcare benefits.

4. Data, Data and More Data

KBI Benefits refers to this advantage of a MERP as an “employee healthcare usage gage” in a post on their company’s blog. This is a great description, particularly with many groups currently unable to view their claims experience due to their size or pooling arrangement. For example, with portions of copay being run through the MERP administrator and the insurer, the employer will suddenly have full access to detailed utilization data specific to their employee population.

5. A Bite-Sized Portion of Consumerism

This approach introduces a behavioral element to an employer’s plan design without financial impact on the plan participant. More on this later.

6. Defined Contribution

Remember the massive shift from pensions to 401k plans during the 80s and 90s? We are just now seeing a similar movement within group medical benefit offerings. Business needs are pushing more and more employers to seek ways to fulfill their desire to care for employees’ physical well-being without exposing themselves to unlimited risk. Using a MERP in conjunction with an insured medical plan allows employers to easily compose a fixed contribution strategy even over multiple years.

MERP vs. HRA: What’s the Difference?

In many ways, a MERP looks and acts similarly to a traditional HRA.

In addition to the items discussed above, both programs are tax-advantaged. So long as the employer takes appropriate care to maintain plan compliance, funds placed in a MERP are tax-deductible to the employer, and distributions are tax-exempt to employees. This is because the IRS excludes “any medical care reimbursement made to or for the benefit of an employee under a self-insured medical reimbursement plan (within the meaning of section 105(h)(6) )” from the definition of wages.

However, there are a few key differences. Unlike a traditional HRA, employee contribution is permissible with a MERP plan. This allows employers to share administrative expenses with employees in addition to claims and insurance costs. The ability to set premium equivalent rates is a huge aid to an employer considering this program as an alternative to traditional insurance.

Some administrators can even assist with accurate data-based cost projections and formulating premium equivalent rates at plan inception and each subsequent renewal. And, although both are notional benefits programs, meaning that money is earmarked but not spent until claims are actually incurred, the MERP is the only option that does not require any physical account.

MERPs also tend to offer more freedom in a few key ways. First, many HRAs are linked directly to the medical insurer as a part of the service offering. In contrast, placing a MERP with an outside administrator makes it easier to market underlying health insurance plans at renewal to keep rate increases in check with minimal visibility to employees. With a MERP, an employer also can create several different plan options atop a single carrier plan, offering greater flexibility over traditional HRAs, which pair on a 1:1 basis.