What is a MERP, and what are the compliance obligations associated with one?

A medical expense reimbursement plan, or MERP, is a type of HRA meant to assist employees with their medical expenses. While specially named, for all compliance-related purposes, a MERP functions and should be treated like an HRA. Specifically, a MERP (like an HRA) is a 100% employer-funded account that reimburses employees (and their spouses/dependents) for incurred medical expenses on a tax-advantaged basis (the MERP reimbursements are not included in the gross income of the employees). There are no employee pre-tax contributions towards MERPs, so there are no related Section 125 compliance issues. Employers sometimes offer MERPs alongside a medical plan or to a specific group of employees.

Generally, compliance issues posed by a MERP will depend on the structure of the MERP itself, including the group of employees eligible for the MERP, the types of expenses that qualify for reimbursement, the maximum reimbursement amount, and the types of plans it is coupled with (including an HDHP/HSA plan). Below are a few of the compliance considerations when offering a MERP.

First, the Section 105 nondiscrimination rules apply directly to self-insured plans, and MERPs are considered a type of self-insured plan. Generally, the nondiscrimination rules prohibit plan designs from favoring highly compensated individuals (HCIs, defined very generally as the top-25% of all employees with respect to compensation, although it also includes a top-five-paid officer and a more-than-10% shareholder/owner). If a MERP is offered to a classification of employees that consists primarily of HCIs, the MERP would likely be viewed as favoring HCIs. The general consequence is that the HCIs would lose the tax benefits associated with the plan (the reimbursements, or a portion thereof, would become taxable to the HCI). So, if the MERP is offered only to a group of executives or managers (which is a common MERP design), then it is likely to have trouble with the nondiscrimination rules.

Second, if the MERP is offered alongside an HDHP/HSA plan, then the MERP will likely cause employees in those plans to lose HSA eligibility. This is because a MERP is generally considered “first dollar” (impermissible) coverage, since it is reimbursing coverage under the statutory minimum deductible for HSA-qualifying HDHP plans. So, employers should consider offering a MERP alongside a non-HDHP plan so that there's no HSA issue, and then make it available to anyone that enrolls in that non-HDHP plan so that there's no nondiscrimination issue. Another possibility is to offer a MERP in lieu of the HSA option, as the primary way to assist employees with the cost-shifting burden of a low deductible.

A third issue is the ACA. The ACA’s employer mandate requires an offer of coverage to any employee working 30 hours or more per week, and a MERP will not generally constitute an offer of coverage. So, a stand-alone MERP offering (in lieu of major coverage) may not meet the employer mandate offer requirement. Further, the ACA requires HRAs to be integrated with a group health plan — so the MERP should be offered alongside an employer plan (integrated) anyway. If it is not integrated, then the MERP on its own (considered a group health plan subject to ACA) would violate at least two of the ACA's requirements: coverage of preventive services without cost-sharing and prohibition on annual dollar limits for essential health benefits. So, the MERP should be offered alongside the employer's major medical plan rather than as a stand-alone MERP, as a way to avoid these ACA issues.

Lastly, a MERP would generally be considered a group health plan, and that means it must comply with ERISA, COBRA, and other benefit laws and regulations. The best approach is to build the MERP in as a component benefit of the group health plan itself. If it is integrated, then the plan as a whole (bundled together) will satisfy ERISA, COBRA and other compliance requirements. If it's offered on its own, the MERP would have to meet those requirements independently (e.g., the MERP must have its own plan docs). In addition, wherever the MERP benefits are described, it is important to clearly outline eligibility, MERP reimbursement limits, and the types of medical expenses that could potentially be reimbursed. Some MERPs limit the types of expenses to dental and vision only, which would create a limited purpose type of HRA, and that could eliminate the HSA and some ACA issues above. Regardless, a clear description and communication of MERP benefits will help employees clearly understand what they are getting with the MERP.