Getting the Most Out of Your Insurance Plan

A medical expense reimbursement plan (MERP) is an employee fringe benefit which can provide your employees with significant tax breaks and savings.

An additional fringe benefit is the option to establish everything under the umbrella of a Cafeteria Plan. With MERPs, the employer pays reimbursement costs, and with Cafeteria Plans, the employee covers costs through salary reductions.

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Plan Overview

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Carriers include Blue Shield of California, Kaiser Permanente, Health Net, Chinese Community Health Plan

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Ease of use with Debit Card option

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Simplicity of Prescription Card option

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Custom benefit design is a hallmark of this approach

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Ease of banking arrangement for claims reimbursement

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Performance reporting to monitor savings

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Dual plan option with Kaiser Permanente available


Your plan must meet two important requirements under the rules of Internal Revenue Code Section 105 before achieving non-discriminatory and tax-free fringe benefit status for eligible employees:

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Benefits Test

The first requirement is that all benefits provided to Highly Compensated Employees (HCEs) and their dependents be duplicated for all other employees and their dependents. Limits set for the plan must be uniform for all participants and dependents, and may not be modified to age or length of service. In short, a plan may not discriminate in terms of benefits offered.

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Eligibility Test

The second requirement is that a plan cannot discriminate as to eligibility. The plan must pass at least one of these three requirements:

At least 70% of all non-excludable employees must participate in the health plan.

At least 70% of all non-excludable employees are eligible to participate in the plan, with at least 80% of all eligible employees participating.

The plan must not discriminate in favor of HCEs (per review by the IRS) and be offered to a “fair cross-section” of employees.

Filing Requirements

There are none. Self-insured health plans are “required” to file annual returns with the IRS and in some cases, with the Department of Labor (companies with 100+ employees). However, the IRS suspended the filing requirement until further notice. This was in 1990, and the policy has yet to be updated.

How It Works

Setting up a MERP can cover expenses below the deductible. The company can safely raise the deductible, dramatically lowering premiums without cost to employees. Both company and employees save money.

With a MERP, employers agree to pay part of their employee medical expenses. The employer offers one deductible to the employees, and contracts with the insurance carrier for a higher deductible. The difference between those two deductibles is the amount that is self-insured.

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MERPs with Group Insurance

The deductible on the group plan is raised, and employees are reimbursed for the difference in the deductible. This effectively allows employers to self-insure a portion of their group insurance plan using pre-tax dollars for significant savings without change in coverage.

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MERPs for Vision & Dental

MERPs allow employers to only reimburse certain types of expenses. If an employer wants to offer a vision/dental plan without buying expensive insurance, they can offer a MERP to their employees that only reimburses for vision and/or dental expenses. This allows the employees to know that they’re covered for basic expenses without huge premiums.