Could You Be Saving Money with a Medical Reimbursement Plan?

February 18, 2024

With the rising costs of healthcare, many employers are choosing to offer medical expense reimbursement plans to their employees. In the following article, we provide a quick summary of medical expense reimbursement plans, including what they are, how they work, and why employers use them. Keep reading to find out more.

What is a medical expense reimbursement plan

A medical expense reimbursement plan (MERP) is a pre-defined allowance of tax-free money offered by employers to their employees to pay for eligible medical expenses.

MERPs can be offered alongside group health insurance and are commonly used with high deductible health plans (HDHPs) as a way for employers to self-insure a portion of the group health insurance plan with pre-tax dollars by reimbursing employees for the increased deductible, thus saving money for all. MERPs offered with a group health insurance plan are often referred to as group coverage HRAs (GCHRAs), group HRAs, integrated HRAs, or deductible HRAs.

MERPs can also be offered as a stand-alone arrangement to replace traditional group health insurance. In this case, the employer offers a MERP to help offset employee costs related to individual health insurance plans. The qualified small employer HRA (QSEHRA) is one such example of a stand-alone MERP offered by small businesses with fewer than 50 full-time equivalent employees.

In addition, MERPs can be tailored to specific categories of health care expenses, such as vision and dental care. These can be helpful if an employer wants to provide a traditional group health insurance plan but save on the cost of dental and vision insurance by offering a reimbursement arrangement through a MERP. The employer can decide which expenses are reimbursable through the MERP.

Now that we’ve seen a few different scenarios in which employers may offer MERPs to their employees, let’s take a look at how these plans work.

How does a medical expense reimbursement plan work?

Using a MERP requires a few steps on the part of the employer and the employee:

  1. Employers choose a monthly allowance amount for the MERP, which is the maximum amount employees can be reimbursed per month for eligible medical expenses.
  2. Employees make qualified purchases related to the medical, dental, and/or vision care needs of themselves or their families.
  3. Employees submit the proper documentation as proof of purchase, such as a receipt or Explanation of Benefits (EOB). The proof of purchase documents must include all essential information, such as the date of purchase for the product or service, the amount, the employee’s name, and a description of the product or service.
  4. Employers review the reimbursement request and reimburse employees according to the MERP’s eligibility criteria.
  5. Employers accurately report all employee claims reimbursed through the company MERP program in order to ensure compliance with IRS guidelines as well as accurate record-keeping for the business budget.

Why use a medical expense reimbursement plan?

As an employer, you may want to consider using a MERP with your employees, as it presents several advantages:

  • ✅ Tax Savings – Not only are reimbursements made to the employee tax-free, contributions by the employer to a MERP plan are tax-deductible business expenses (once the funds have been reimbursed to the employee).
  • ✅ Employer Control – With a MERP, the employer can design a plan that best meets the needs of the business and the employees; choose the monthly allowance, decide which medical, dental, and vision expenses are reimbursable, and consider whether the MERP will stand in for a traditional health insurance plan or complement the coverage already offered.
  • ✅ Employee Flexibility – MERPs offer plenty of flexibility for employees when it comes to the types of medical, dental, and vision expenses that can be reimbursed; use the plan for deductibles, copays, prescription medications, and much more.

MERPs can be customized to suit the best interests of you and your employees and make for an excellent, tax-advantaged health savings tool for your childcare team.

Have questions about which tax strategies can save you and your employees money? Reach out to the experts at Honest Buck. We can help you decide which health savings tools, and other tax-savvy employee benefits, are right for your Early Childhood Education business—contact us today.

Share this article