Before looking at how a MERP can provide benefits, let’s backtrack a bit and clarify just what is meant by MERP.
A MERP is a Medical Expense Reimbursement Plan. It allows a small business owner to not only provide protection for his or her own health care needs but also for the health care needs of employees.
The benefits of a MERP won’t help to lower the cost of healthcare, but they do allow you to use the plan to pay for medical expenses tax-free. The basics of the MERP is the use of pre-tax dollars to pay for your out of pocket medical expenses and those of your employees.
It is critical to keep in mind this isn’t just a percentage, it is 100% of the out-of-pocket medical expenses for yourself and your employees, all out of those pre-tax dollars. By using the MERP option, you also don’t have to worry about the 10% requirement for itemized deductions. To make it even more appealing, as an employer you will also avoid self-employment tax on any deductions as plan benefits.
If you are not using the potential of the MERP for tax reasons, here are some very critical factors to consider:
- As the employer, you can create your own flexible MERPs including deductibles, covered expenses, and even the co-payments employees will pay.
- The employer contributes to the MERP, and these contributions are tax-free in addition to allowing for a lower cost for the overall group insurance.
- A MERP can be used to cover individual health insurance policy premiums.
- The MERP can be offered by an employer while employees choose their own health care plans. This simplifies paperwork for the employer while building in benefits to the employees.
- If you do offer a group health care plan, the MERP can be used to address medical services outside of the scope of the plan including vision, dental, chiropractic, medical devices and psychiatric therapy coverage. It can also cover the cost of special education programs, fertility treatments, and nursing home care.
- If you run your business as a proprietorship, partnership, LLC, or “S” corporation, you’re considered “self-employed,” and not eligible.2 If you’re single, you can establish a C corporation and pay benefits to yourself as an employee. If you’re married, you can hire your spouse and pay the benefits through him or her.3 If you operate as an S corporation, you and your spouse are both considered self-employed. (In that case, segregate part of your income through a proprietorship or C corporation and pay benefits through that entity
A business can benefit from offering a MERP through the flexibility of the plan, the ability to deduct medical expenses before taxes and also the help it provides to employees. With the ability for the employer to offer a MERP rather than a limited group insurance plan, employees can choose their own level of health care policy and be reimbursed up to the limit set by the employer. This freedom is very appealing to many employees, helping to boost retention and also to limit the time and cost of a small business owner trying to administer a full group insurance program that is a good match for everyone in the business.