What Is a MERP Plan and How Does It Work?

A Medical Expense Reimbursement Plan (MERP) is an employer-funded arrangement designed to reimburse employees for qualified medical expenses. These plans are a type of Health Reimbursement Arrangement (HRA) established by employers. MERPs allow businesses to help employees manage healthcare costs, either in conjunction with a traditional health insurance plan or as a standalone benefit.

The funds within a MERP are entirely owned by the employer, distinguishing them from personal savings accounts. These are considered notional accounts, meaning employees do not have direct access to the cash itself. Instead, the employer promises to reimburse employees for eligible expenses up to a predetermined limit. This employer ownership provides businesses with greater control over healthcare spending while still offering a valuable benefit.

Operational Mechanics of MERP Plans

MERP plans operate through a reimbursement process where employees first incur a medical expense and then submit a claim for repayment. After an employee pays for an eligible healthcare service or item, they provide documentation, such as receipts or an Explanation of Benefits, to the employer or a third-party administrator. The administrator reviews the claim to verify that the expense is qualified under the plan’s rules. Once approved, the employer reimburses the employee directly from the MERP funds.

Employers define eligible expenses for reimbursement. Common eligible expenses typically include health insurance deductibles, co-payments, coinsurance, prescription drugs, and costs for dental and vision care. The Internal Revenue Service (IRS) provides a comprehensive list of qualified medical expenses in Publication 502, which employers often reference, though they can choose to restrict this list further. Employer contributions to MERP accounts can be allocated as annual allowances or monthly accruals, depending on the plan design.

Some MERP plans may allow for the carryover of unused funds from one plan year to the next, which is determined by the employer’s specific plan rules. This feature can provide employees with accumulated funds for future, potentially larger, medical costs. However, it is important to note that the employer retains ownership of all funds, and typically, any unused balance in the MERP is forfeited if an employee terminates employment. This structure ensures that the employer maintains control over the benefit while it is active.

Tax Implications for MERP Participants

MERP plans offer significant tax advantages for both employers and employees. For employees, reimbursements received for qualified medical expenses are generally tax-free. This means the funds are not considered taxable income. This tax-free status applies to reimbursements for medical care expenses as defined by the IRS.

Employer contributions to MERP plans are typically tax-deductible business expenses for the employer. This allows businesses to reduce their taxable income by providing this health benefit to their employees. The tax-advantaged status of MERPs is primarily governed by Internal Revenue Code (IRC) Section 105. This section permits employers to establish written plans for reimbursing medical expenses, ensuring that both employer deductions and employee exclusions from income are permissible under federal tax law.

Key Distinctions from Other Health Accounts

Medical Expense Reimbursement Plans (MERPs) differ from other common health benefit accounts like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) in several fundamental ways. A primary distinction lies in ownership and funding. MERPs are employer-funded and employer-owned, meaning the funds belong to the company and are not portable if an employee leaves the organization. In contrast, HSAs are employee-owned accounts, and the funds are portable, allowing employees to take them if they change jobs.

HSAs require enrollment in a High-Deductible Health Plan (HDHP) and allow both employee and employer contributions. HSA funds can be invested and grow tax-free, serving as a long-term savings vehicle. FSAs are tax-advantaged for qualified medical expenses and are typically funded through employee pre-tax salary deductions, though employers may contribute. FSAs are generally subject to a “use-it-or-lose-it” rule, meaning unused funds may be forfeited at the end of the plan year, although some plans permit a limited carryover or grace period. MERPs do not typically involve employee contributions, and while some may allow carryover, the funds always remain employer property, unlike HSAs.