A MERP is a medical expense reimbursement plan. Interestingly, MERPs lack a well-defined meaning under the Code, ERISA, and other laws, which often causes confusion. However, as the term is commonly used in the industry, a MERP is understood to be an HRA. As such, A MERP is a 100% employer-funded account that reimburses employees (and their spouses/dependents, if applicable) for incurred medical expenses on a tax-advantaged basis.
Accordingly, compliance issues posed by MERPs are considered to be the same as those applicable to HRAs: the structure of the MERP itself, including the group of eligible employees, the types of expenses that qualify for reimbursement, the maximum reimbursement amount, and the type of plan(s) with which it is coupled. Some of the important compliance considerations are outlined below. (Notably, since there are no pre-tax contributions to a MERP, employers do not need to be concerned with the Section 125 cafeteria plan rules when offering a MERP.)
First, MERPs are considered self-insured plans (just like HRAs) and thus the Section 105 nondiscrimination rules apply. 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 they also include 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). Therefore, 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 a qualified HDHP plan (meaning it is HSA-compatible), 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. If employers want to offer a MERP alongside a qualified HDHP, they should implement a post-deductible MERP so that reimbursements do not begin until at least the statutory minimum deductible has been met. Alternatively, employers may offer a MERP alongside a non-HDHP plan, such as a PPO, or offer it in lieu of the HSA option, as the primary way to assist employees with the cost-shifting burden of a low deductible. Accordingly, employers should carefully consider the type of major medical plan that the MERP will be paired with when designing the arrangement.
A third issue is ACA compliance. The ACA requires HRAs to be integrated with a group health plan, so the MERP should be offered alongside an employer’s major medical plan. If it is not integrated, then the MERP would need to independently satisfy ACA group health plan requirements which it practically could not, and, therefore would violate several important ACA requirements (e.g., coverage of preventive services without cost-sharing, the prohibition on annual dollar limits for essential health benefits). So, the MERP should be paired with the employer's major medical plan rather than offered on a stand-alone basis.
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 major medical plan itself. As an integrated plan, it will satisfy ERISA, COBRA, ACA, and other compliance requirements. If it's offered on its own, the MERP would have to meet those requirements separately, which would be difficult to accomplish. Since MERPs are subject to federal group health plan laws, employers should remember that they may have annual filing obligations such as Form 5500 or PCORI, depending on enrollment size and plan design. Additionally, plan documents should clearly outline eligibility, reimbursement limits, and eligible medical expenses. 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.
For further information regarding MERPs and HRA rules, please ask your broker or consultant for a copy of the NFP publication HRAs, ICHRAs, and Other Employer Reimbursement Arrangements.