Section 105 Medical Expense Reimbursement Plans (MERP)

A Section 105 Medical Expense Reimbursement Plan, often called a MERP, lets an employer reimburse eligible medical expenses under a written employer plan. Section 105 is the tax code section that explains how amounts received through accident or health plans are treated, and Section 105(b) allows tax-free treatment when the money is used for medical care. See my main Section 105 page and 26 U.S. Code §105.

A MERP is not just “the boss paying somebody back.” It should be a written plan, limited to eligible medical expenses, and reimbursements should be substantiated before payment. The IRS has recognized employer medical reimbursement arrangements that reimburse substantiated medical care expenses for employees, spouses, dependents, and sometimes retirees or surviving dependents. IRS Revenue Ruling 2005-24.

What can a Section 105 MERP reimburse?

A MERP may reimburse medical care expenses as defined under Internal Revenue Code Section 213(d). That can include many out-of-pocket medical, dental, vision, prescription, and other qualified expenses, depending on how the plan document is written. 26 U.S. Code §213(d) and IRS Publication 502.

Some Section 105 arrangements are designed to work with a group health plan, such as reimbursing deductibles, copays, coinsurance, or other expenses not paid by the insurance company. This can be useful when an employer wants a richer benefit without changing the underlying group medical plan. Small Group Health Insurance.

Important ACA warning: individual policy reimbursement is restricted

After the Affordable Care Act, an employer generally cannot simply reimburse employees tax-free for individual health insurance premiums unless the arrangement fits a permitted structure, such as a QSEHRA or ICHRA. The IRS says employer payment plans that reimburse individual policy premiums are group health plans and may fail ACA market reform rules, potentially triggering penalties. IRS Employer Health Care Arrangements and IRS Notice 2013-54.

MERP, HRA, QSEHRA, ICHRA — don’t mix them up

A Section 105 MERP is the tax framework. An HRA is one common type of Section 105 reimbursement arrangement. QSEHRA and ICHRA are more specific modern arrangements with their own rules. If the goal is to reimburse individual health insurance premiums, the employer should not assume a basic MERP is enough. IRS Publication 15-B.

Who should look at a MERP?

A MERP may make sense for an employer that already offers a group health plan and wants to help employees with deductibles or other out-of-pocket costs. It may also be part of a broader Section 105 strategy, but the plan has to be designed correctly so it does not accidentally become a noncompliant employer payment plan. Section 105 overview.

Related employer health plan pages

Need help deciding whether a MERP fits?

Section 105 plans can be helpful, but they are technical. The practical question is usually: “Are we reimbursing out-of-pocket expenses under a group plan, or are we trying to reimburse individual health insurance premiums?” That difference matters. Email me before setting this up so we can review the goal and avoid a tax or compliance problem.

Email Steve Shorr