Wondering if you can reimburse employees for medical expenses? A health reimbursement arrangement (HRA) is an employee medical reimbursement plan that allows business owners to reimburse employees for health insurance premiums and qualified medical expenses on a tax-free basis. Now there are two types of HRAs that make it possible for employers to reimburse employees for health insurance and qualified medical expenses tax-free.
Reimburse Employees for Medical Expenses, Health Insurance Costs: How a Medical Expense Reimbursement Plan Works
Implementing a Medical Expense Reimbursement Plan (MERP) offers a structured approach to managing healthcare costs within a company. It ensures employers and employees benefit from efficient and effective medical expense reimbursement. These plans are an integral part of a company's benefits package, offering reimbursement for personal health care expenses in a tax-efficient manner.
Understanding Medical Expense Reimbursement Plans
A MERP, or Medical Expense Reimbursement Plan, allows employers to reimburse employees for out-of-pocket medical costs and individual health insurance premiums. These plans are particularly beneficial because they are customizable and can be adapted to the specific needs of both employers and employees. By utilizing a MERP, businesses can manage their healthcare budgets more effectively while providing substantial health benefits to their employees.
Benefits of MERPs
The primary advantage of adopting a medical expense reimbursement plan is its ability to provide tax-advantaged health benefits. Payments made through MERPs are tax-deductible for the employer and are not taxable income for the employee, making them a cost-effective solution for both parties. This system encourages employees to seek the care they need without worrying about the financial burden, as they know they will be reimbursed for medical expenses.
How MERPs Enhance Employee Health Coverage
One key feature of a MERP is its flexibility. Unlike traditional health insurance plans that may offer unnecessary coverage or not enough of the needed coverage, MERPs allow employees to use their designated funds for a wide range of medical expenses. Depending on the specifics of the plan set by the employer, this can include everything from doctor's visits and prescription drugs to dental and vision care.
How to Get Reimbursed for Medical Expenses
The process of reimbursement under a MERP is straightforward:
- Allowances Set: Employers set specific allowances for medical expenses, which can vary by employee based on their role, family size, or other factors.
- Employees Purchase Healthcare: Employees pay out-of-pocket for their medical costs.
- Proof of Expense is Submitted: Employees submit proof of their medical expenses to their employer, usually as receipts or invoices.
- Employers Review Documentation: The employer reviews the submitted documentation to ensure the expenses are eligible under the terms of the MERP.
- Reimbursement is Given: Once approved, the employer reimburses the employee for their costs up to the set allowance.
This system provides financial relief to employees and incentivizes them to manage their health proactively. Employers benefit from a healthier workforce and the tax advantages these plans offer.
A Medical Expense Reimbursement Plan is a flexible and efficient tool for managing healthcare expenses in a corporate setting. By understanding how to implement and manage a MERP, employers can ensure they provide valuable employee benefits, boosting satisfaction and retaining talent. As medical costs continue to rise, a robust strategy like a MERP can significantly mitigate the financial impacts on employees and the company.
Employee Medical Reimbursement: A History
The concept of reimbursing employees for medical expenses has evolved significantly over the past century, reflecting broader changes in healthcare systems and labor rights. Initially, during the early 20th century, few protections or benefits related to health existed for workers. However, as industrialization increased, so did the recognition of the need to support workers' health not just for ethical reasons but also for productivity.
The turning point came post-World War II, when businesses began offering health benefits to attract and retain talent in a booming job market. This era saw the introduction of employer-sponsored health insurance, which became a staple of employee benefits packages. As these benefits became more common, the need for flexible and cost-effective methods to manage them led to the development of reimbursement models.
In the 1970s and 1980s, with rising healthcare costs and a shift towards more personalized employee benefits, Medical Expense Reimbursement Plans (MERPs) began to take shape. These plans were designed to provide a more flexible approach to managing healthcare expenses, allowing employers to reimburse employees for out-of-pocket medical costs on a pre-tax basis, thereby offering tax savings to both parties.
The introduction of the Affordable Care Act in 2010 further influenced the structure of these plans, emphasizing the need for affordability and accessibility in healthcare. Today, Medical Expense Reimbursement Plans have evolved into sophisticated frameworks, like Health Reimbursement Arrangements (HRAs), that support diverse workforce needs while providing substantial tax benefits.
In late 2016, President Obama signed the bipartisan 21st Century Cures Act into law, opening the doors for health reimbursement arrangements for small employers. Three years later, regulatory rule updates allowed employers of all sizes to use this same treatment with a greater degree of flexibility.
So, What is a MERP?
A Medical Expense Reimbursement Plan (MERP) is an employer-funded health benefit plan reimburses employees for out-of-pocket medical expenses and individual health insurance premiums. MERPs are not health insurance plans; they allow employers to give employees a designated amount to cover medical costs tax-free.
The key feature of a MERP is its flexibility. Unlike traditional health insurance, which may come with fixed coverage, MERPs allow employees to choose what health-related expenses they want to get reimbursed for within the guidelines set by their employer. This can include a wide range of medical costs, from premiums for a health insurance policy to copays, deductibles, and sometimes over-the-counter medications.
Employers benefit from MERPs because they can control health benefits costs by setting caps on reimbursements and are not tied down by the rising premiums of traditional health insurance plans. Additionally, employers' amounts on MERPs are generally tax-deductible, making MERPs financially favorable for businesses.
This plan type is particularly suited for small to medium-sized businesses looking to provide health benefits without the significant financial burden of group health insurance plans. MERPs also promote a proactive approach to healthcare by empowering employees to manage their health expenses more effectively.
How do Medical Expense Reimbursement Plans Work?
Medical Expense Reimbursement Plans (MERPs) provide a systematic approach to handling health-related expenses in the workplace. These plans are highly appreciated for their flexibility and cost-effectiveness from an employer and employee perspective. Here's a breakdown of how these plans typically operate:
Allowances are Set
Under MERPs, employers start by defining the allowances for each employee. These allowances represent the maximum amount an employee can claim for medical expenses for a set period, typically a year. Employers can vary these allowances based on several factors, including employee status (full-time or part-time), family size, or specific job roles. By setting these allowances, employers can control costs and budget for health benefits more predictably.
Employees Purchase Healthcare
Once the allowances are established, employees are responsible for purchasing their healthcare services. This step underscores the flexibility of MERPs, as employees can choose providers and services that best meet their individual or family health needs without being confined to a network. Employees can make health care decisions that suit their preferences and requirements, whether a doctor's visit, dental procedure, or alternative therapies.
Proof of Expense is Submitted
After incurring medical expenses, employees must submit proof to their employer to claim reimbursement. This documentation typically includes detailed receipts, invoices, or statements from healthcare providers. The evidence should indicate the service provided, the date of service, and the amount charged. The accurate and timely submission of these documents is crucial to the reimbursement process.
Employers Review Documentation
Upon receiving the proof of expense, employers or their designated plan administrators review the documents to ensure that the costs are eligible under the terms of the MERP. This review process is vital to verify that the claims adhere to internal policy guidelines and applicable regulatory requirements. Employers must also ensure that the expenses fall within the employee's set allowances.
Reimbursement is Given
Once the review is complete and the expenses are approved, the employer reimburses the employee for the eligible costs up to the maximum allowance defined. This reimbursement is usually made through payroll and is tax-free for the employee, providing a significant financial benefit. Employers also benefit, as they can deduct these costs as business expenses, thus reducing their taxable income.
This structured process helps maintain transparency and accountability in managing healthcare benefits, ensuring that both employers and employees can maximize the advantages offered by MERPs.
Types of MERPs Available
Medical Expense Reimbursement Plans (MERPs) come in various formats, each designed to cater to employers' and employees' needs and preferences. Here's a closer look at the different types of MERPs available:
HRA (Health Reimbursement Arrangement)
A Health Reimbursement Arrangement (HRA) is one of the most common types of MERPs. HRAs are employer-funded plans that reimburse employees for qualified medical expenses, including health insurance premiums. These arrangements are highly flexible and can be designed to complement other health benefits, offering a tax-advantaged way to cover healthcare costs. Employers retain control over how much they contribute, and unused funds can typically be rolled over to the next year, depending on the plan design.
Group Plan
Group MERPs are structured around the traditional group health insurance model but with the added flexibility of reimbursement for additional out-of-pocket expenses not covered by the insurance. This type of plan benefits employers who want to offer a more traditional health benefit but with the personalized benefit of reimbursements for a broader range of medical expenses.
Individual Plan
Individual MERPs provide a reimbursement framework for employees who purchase their health insurance instead of participating in a group health plan. This plan type is particularly advantageous under certain circumstances, such as when employees are in geographic locations not well serviced by traditional group plans or when they prefer plans not offered by their employer.
Vision or Dental
Specific MERPs can be designed to cover vision and dental care expenses, often not included in standard health insurance plans. These targeted MERPs allow employers to provide additional benefits that cater to their employees' preventive health needs, covering everything from routine eye exams to dental cleanings and orthodontics.
Each type of MERP offers distinct advantages and can be tailored to meet the diverse needs of an organization’s workforce. By understanding the variety available, employers can better design a plan that maximizes employee benefits while managing costs effectively.
HRA Employee medical reimbursement plan options
There are two types of employee medical reimbursement plans that we will cover today.
QSEHRA
QSEHRA: a Qualified Small Employer HRA allows small employers to set aside a fixed amount each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits tax-efficiently without the hassle or headache of administering a traditional group plan and employees can choose the plan they want. The key thing to remember here is that all employees must be reimbursed at the same level. The QSEHRA is designed for employers with less than 50 employees to reimburse premiums and medical expenses if the plan allows. There are limits on reimbursement, which you can find in this post on 2023 QSEHRA contribution limits.
ICHRA
ICHRA: an Individual Coverage HRA, sometimes referred to as an ICHRA plan, is a new “flavor” of HRA that allows employers of any size to reimburse any amount per month for healthcare expenses incurred by employees on a tax-free basis, starting at any time of the year. The distinguishing element of this HRA is that employees can be divided into unlimited classes, like hourly vs. salary or even based on location, and be reimbursed at different levels. The ICHRA is for companies of any size. There are no limits to how much an employer can offer for reimbursement with ICHRA, which is one of the many pros when you look at ICHRA pros and cons.
→ Learn more about HRA individual health insurance options.
ICHRAs have grown 3.5x in the past year and QSEHRAs have doubled in size on the market during that same time period, according to the HRA Council.
→ More on Employee Medical Reimbursement
→ Learn more about how an HRA is funded.
→ Check out our post on HRA account pros and cons.
How reimbursement of medical expenses works with an HRA
The mechanics of reimbursement of medical expenses with an HRA are surprisingly simple. At a high level, employees pay for their own health expenses, and employers reimburse them. Here’s how it works:
- Employers design their plans and set reimbursement allowances
- Employees pay for their own health insurance and medical bills
- Employees provide proof of their expenses
- Employers reimburse the employee up to the set limit
→ Read more about how healthcare reimbursement works here!
→ Learn more about how tax-advantaged HRAs win over medical stipends.
How can I reimburse employees for medical expenses?
To reimburse employees for medical expenses, you will need to understand how an HRA works and how easy our HRA administrator tool makes that for you.
We make it easy for employees to just snap a picture of their receipts for reimbursement. Employers have a lot of flexibility over what is reimbursed. Understanding the impact of these options can go a long way towards helping the employer achieve their objectives and keep their budget in check.
- Reimburse Insurance Premiums Only: Employers can limit reimbursements to eligible premium expenses only. Typically, this refers to individual health insurance premiums but could also include eligible dental premiums, vision premiums, etc. as long as the employee has Minimum Essential Coverage (MEC) for QSEHRA or a qualified health plan for ICHRA.
- Reimburse Insurance Premiums and Medical Expenses: Most employers also allow medical expenses to be reimbursed. Note that employers can exclude categories of expenses (e.g., “prescriptions”) as long as the exclusion is applied fairly to everyone.
Wondering what counts as qualified medical expenses? Here’s a comprehensive list!
Can an employer reimburse for health insurance costs?
The answer to that is yes! An employer can reimburse for health insurance costs through an HRA.
An HRA allows business owners to reimburse their employees on a tax-free basis for health insurance premiums or qualified medical expenses. Most importantly, HRAs allow business owners to avoid the penalties and fees and taxes we discussed.
The mechanics of an HRA are surprisingly simple. At a high level, employees pay for their own health expenses, and employers reimburse them. Here’s how it works:
- Employers design their plan and set reimbursement allowances
- Employees pay for their own health insurance and medical bills
- Employees provide proof of their expenses
- Employers reimburse the employee up to the set limit
→ Learn more about how an HRA is funded.
→ Compare HRAs vs Group Plans.
→ Read more about Employer HRA Contributions.
Legal and Compliance Considerations
When implementing a Medical Expense Reimbursement Plan (MERP), employers must understand and adhere to specific legal and compliance requirements. These plans are regulated under various federal laws, including the Affordable Care Act (ACA), the Internal Revenue Code, and the Employee Retirement Income Security Act (ERISA). Compliance with these laws ensures that MERPs provide the intended tax advantages while protecting the employer and employees.
Key Legal Aspects
- ERISA Requirements: Most MERPs are group health plans under ERISA, so they must comply with ERISA’s reporting and disclosure requirements. This includes providing plan descriptions to participants and filing annual reports with the federal government.
- ACA Compliance: MERPs must not violate the ACA’s market reforms. For instance, MERPs must be integrated with a group health insurance plan that meets the ACA’s minimum essential coverage standards to avoid penalties.
- Nondiscrimination Rules: Under the Internal Revenue Code, MERPs must not discriminate against highly compensated employees regarding eligibility to participate or benefits provided. Ensuring compliance with these rules is essential to maintaining the plan's tax benefits.
Employers must regularly review their MERP policies and operations to ensure they align with current laws and regulations, which may change over time. Consulting with legal experts in employee benefits law is often necessary to navigate these complex requirements successfully.
Tax Implications
The tax implications of Medical Expense Reimbursement Plans are significant and beneficial for both employers and employees, but they must be carefully managed to ensure compliance with tax laws.
For Employers:
- Employer Contributions are Tax-Deductible: Amounts that employers pay into MERPs are generally tax-deductible as a business expense, which can lower the overall cost of employee benefits.
- Payroll Tax Savings: Employee contributions do not count as taxable income for employees; therefore, these are not subject to payroll taxes, generating additional savings for the employer.
For Employees:
- Exclusion from Gross Income: Employees do not have to include the reimbursement amounts in their gross income. This means medical expenses paid through a MERP are effectively paid with pre-tax dollars, providing a significant tax advantage.
- No FICA or FUTA Taxes: Since the reimbursements are not considered wages, they are not subject to Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) taxes.
To maintain these tax benefits, it is critical that the MERP strictly adheres to IRS guidelines regarding eligible expenses, documentation requirements, and nondiscrimination rules. Employees should also maintain accurate records of their medical expenses and any reimbursements received, as these records may be necessary for tax verification.
Technology and Management Tools
Modern technology and management tools facilitate efficient management of medical expense reimbursement plans (MERPs), simplify administration, and ensure compliance with legal standards. A prime example is the Take Command HRA administration platform, designed specifically for Health Reimbursement Arrangements (HRAs).
Key Features of the Take Command Platform:
- Automated Administration: Streamlines tasks such as tracking claims and processing reimbursements, reducing the burden on HR departments.
- Compliance Tools: Built-in features ensure adherence to IRS guidelines and healthcare regulations, safeguarding against compliance risks.
- Employee Portal: Offers an accessible interface for employees to submit claims, check balances, and monitor reimbursement status, enhancing transparency and trust.
- Document Management: Enables digital storage of receipts and medical records, essential for efficient operation and audit preparation.
- Educational Resources: Provides comprehensive support and information to help employers and employees maximize the benefits of their HRA.
These advanced tools improve administrative efficiency and increase satisfaction and retention by ensuring employees receive timely and accurate health benefits.
Medical Expense Reimbursement Plan FAQ
To help employers and employees better understand Medical Expense Reimbursement Plans (MERPs), we've expanded our FAQ section to cover specific and common queries. This section aims to demystify aspects of MERPs and provide clear, concise answers to frequent questions.
What is a Medical Expense Reimbursement Plan (MERP)?
A MERP is a company-funded program reimburses employees for medical expenses, such as premiums, deductibles, and other health-related costs. This arrangement allows for tax advantages for both the employer and the employee.
How does reimbursement work under a MERP?
Employees pay upfront for medical expenses and submit proof of them, such as receipts or invoices, to their employer. After verifying the expenses, employers reimburse employees up to a predetermined limit.
Are all medical expenses eligible for reimbursement under a MERP?
Not all expenses are covered. Reimbursable expenses must qualify as medical care under IRS guidelines, including treatments, prescriptions, and over-the-counter medications with a doctor's prescription. The details can vary by plan, so checking your particular MERP's guidelines is important.
How to get reimbursed for medical expenses?
To get reimbursed for medical expenses under a Medical Expense Reimbursement Plan (MERP), confirm that your expense is eligible under your specific plan. Pay for the medical service or product upfront and keep all related receipts or invoices. Submit these documents to your employer or plan administrator through the designated submission process, ensuring details like the service date and amount are included. After your documents are reviewed and verified for eligibility, you will receive tax-free reimbursement through payroll up to your plan's set limit. Always keep good records and adhere to your MERP’s submission guidelines for a smooth reimbursement process.
Can MERPs cover family members?
Yes, most MERPs can extend to cover an employee's family members, including spouses and dependents. The coverage details, including who qualifies as a dependent, can vary, so reviewing your plan's specifics is crucial.
What are the tax benefits of a MERP for employers and employees?
Contributions made to a MERP are typically tax-deductible as a business expense for employers. For employees, reimbursements received are generally tax-free, provided they are used for qualifying medical expenses.
How do I ensure my MERP complies with legal regulations?
MERPs must comply with federal laws, including ERISA, ACA, and IRS guidelines. It's advisable to consult with a legal expert or a tax advisor to ensure your plan meets all necessary legal requirements.
What happens to unused funds in a MERP?
Depending on the plan design, unused funds may roll over into the next year or revert to the employer. Policies on rollovers should be clearly outlined in your MERP documentation.
Take Command, the medical reimbursement experts
For additional resources, check out our HRA Guide, QSEHRA Guide, our ICHRA Guide, or our wildly popular ICHRA FAQ Page. We are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a small business HRA is simple and quick, and our team is here to help if you need it.
→ Learn how health insurance reimbursement works.
→ Learn non-negotiables HRA administrators should offer
This post was originally published in 2020 and has been updated with new information and insights for 2023.
