A MERP or Medical Expense Reimbursement Plan is a type of HRA (Health Reimbursement Account) where employers can pay for a portion of employees’ healthcare costs on a tax-free basis. They’re most frequently utilized with high deductible health plans so that employers have the flexibility to tailor a plan to their needs and the needs of their employees. As a result, employees have healthcare benefits they want and employers provide coverage at a lower overall cost.
As a MERP is subject to Section 105 of the Internal Revenue Code, employers can fund healthcare costs and qualified medical expenses on a tax-free basis. The plan can fund deductibles, coinsurance, copayments, and more. So it’s a pay-as-you-go benefit that pairs with a traditional health plan in such a way that an employer and employee may realize premium savings and benefit enhancements.
How does a MERP work?
A company may be looking for relief after years of increasing health insurance premiums, but it doesn’t want to worsen its benefits to reduce costs. Instead, they choose to install a MERP in response to rising premiums for their low deductible health insurance plan. The company is on the hook for claims up to the plan deductible (or some other amount), and they review and pay claims through a TPA (third party administrator).
Let’s look at a MERP in action:
Company ABC likes the value of offering a health plan with a low $250/$500 deductible, but the premium increases are straining their budget. After discussing a MERP plan with their employee benefits consultant, they raise their health insurance deductible to $4,000/$8,000 and install a MERP plan to offer the $250/$500 to employees. In practice, the MERP plan is responsible for costs from the $250/$500 up to $4,000/$8,000 on the health insurance.
Say an employee has a procedure and the cost is $10,000. Under the health insurance plan, the employee is responsible for $4,000. But once they receive their Explanation of Benefits or EOB which says they’re responsible for that $4,000, they send the EOB to a TPA, since they’re only responsible for $250. The TPA processes the claim and reimburses the employee for $3,750. The employee then can use this amount plus their actual $250 deductible to pay the bill from the provider.
What’s a MERP used for?
As stated above, a MERP is used to fund healthcare expenses between a set dollar amount and the deductible on traditional health insurance. The employer is taking on the risk/reward for whether claims will be high or low in that range for the year across all members, and that the total amount spent will be less given the decrease in health insurance premiums.
For example, let’s look at premiums for a 32-year-old male in Los Angeles. A Bronze PPO with a $5,500 deductible costs $369 per month while a Gold PPO with a $500 deductible costs $573 per month, a difference of $204. Assuming this is a weird group and all 10 employees were 32-year-old men, we would project a savings of $2,040 per month and $24,480 per year.
Does the company expect that all 10 employees will hit their deductible and be due $5,000? Absolutely not.
So the company has to do the math here and wonder whether the expected cost of their MERP program would be greater or lower than the premium savings by switching to the bronze plan.
What’s the difference between a MERP and an HRA?
A MERP and an HRA are both Section 105 plans that sit on top of any health insurance plan. An HRA is typically more restrictive with reimbursements, such as only deductibles and coinsurance expenses, while a MERP can be designed to cover a wider range of medical expenses.
An HRA is 100% employer-funded while a MERP can be designed to have contributions and rates paid by the employees. In this way, a MERP can behave like a mini self-funded plan.
Due to possibly charging contributions to employees, an employer can offer multiple MERPs for each health insurance plan, while an HRA is typically attached to one health insurance plan.
Can you have a MERP and a HSA?
A MERP is a Section 105 plan that can accompany any health insurance plan, while a Health Savings Account or HSA may only accompany a High Deductible Health Plan or HDHP. If an employee were enrolled in an HDHP, then they could both contribute to an HSA while also benefitting from a MERP.
Is a MERP eligible for COBRA?
If an employee is eligible for COBRA, they can be offered the MERP plan but only for a limited period of time.
Is a MERP a self-funded health plan?
A MERP involves a TPA.
A MERP is when an employer pays healthcare costs as incurred.
And a MERP includes a plan document stating when and how an employer will pay healthcare costs.
So, is a MERP a self-funded health plan?
But while a MERP is not a self-funded health plan, it is a step in that direction. A MERP is a way for an employer to start controlling their healthcare costs and gain some insights into their claims year over year. But while an employer is on the hook for 100% of the costs in a self-funded plan (outside of any stop-loss insurance), a MERP caps those costs at some pre-determined amount.
The bottom line is some organizations are at the stage where a MERP or HRA makes sense today, while other organizations are ready to fully transition to self-funding. The key is knowing where you are today and where you’re headed, then deciding how your benefits strategy aligns with your direction and company. No one plan is perfect; every company is different and what works for one company may not work for another.