In this article, we'll provide an overview of healthcare benefit allowances.  Health Reimbursement Arrangements (HRAs) and defined contribution health benefits are types of healthcare benefit allowances.

Hamilton County’s Medical Expense Reimbursement Plan (MERP) aims to keep health benefits for all eligible employees while dramatically cutting costs for the county, which is in deep financial trouble.

Hamilton County’s Medical Expense Reimbursement Plan (MERP) aims to keep health benefits for all eligible employees while dramatically cutting costs for the county, which is in deep financial trouble.

Medical Reimbursement Accounts (MRAs) are IRS-approved plans wherein an employer reimburses an employee, their spouses, and dependents for medical expenses. Because the reimbursement occurs pre-tax via payroll, employees and employers often save up to 50% in combined taxes on the cost of medical expenses.

MERP stands for Medical Expense Reimbursement Plan and is any plan or arrangement under which a business reimburses an employee for out-of-pocket medical expenses incurred by employees or their dependents.  If administered correctly, all reimbursements are paid to the employee 100% tax-free. A MERP is not a Section 125 Plan, Cafeteria Plan, or Flexible Spending Account.  Rather, it is a Section 105 Plan.

In 2014, defined contribution health plans will become the ideal solution for most (if not all) U.S. employers.

There are four basic types of accounts and arrangements that companies use to provide tax-advantaged medical expense and insurance premium reimbursement to employees.

Company Funded Arrangements

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements are tax-advantaged arrangements (not accounts) that employees can use to receive reimbursement for qualified medical expenses, including health insurance premiums. An HRA can supplement a group policy or provide employer funds for an individual health policy. All employees, former employees, and retirees qualify to have an HRA.  HRAs must be 100% funded by employers.


Employee Funded or Owned Accounts

Flexible Spending Accounts (FSAs)

Flexible Spending Accounts are tax-advantaged arrangements where employees convert pre-tax wages into a fixed annual fund to pay for out-of-pocket medical expenses. FSA funds cannot pay for health insurance premiums. All employees qualify to have an FSA. FSAs are generally 100% funded by employees, although employers are allowed to offer incentive Flex Credits as FSA contributions.

Premium Only Plans (POPs)

Premium only Plans are effectively an FSA for individual or family health insurance premiums, as allowed under new IRS regulations effective 1/1/09. Employers can either reimburse employees for individual health insurance policy premiums or pay such premiums directly to insurance carriers. All employees qualify to have a PSA.

Health Savings Accounts (HSAs)

Health Savings Accounts are tax-advantaged consumer savings accounts similar to an IRA or 401k that consumers can use to pay for qualified medical expenses. HSAs are supplements to health insurance since HSA funds cannot generally pay for health insurance premiums. Only employees who obtain HSA-qualified high deductible health insurance from an employer’s group plan or from a individual health policy qualify to have an HSA. HSAs can be funded by employers, employees, or third parties.

A lot of new health benefits plans have become available to employers in the last few years. Many employers are particularly interested in MERPs or "Medical Expense Reimbursement Plans".  I'm going to go over some basic information you might find interesting about MERPs, and then I'll talk a little bit about what interested employers can do to learn more.