Benefits of Implementing a Medical Expense Reimbursement Plan (MERP)
Heath care costs have risen at an alarming rate over the past several years. There is perhaps no one that’s been hit harder in this regard than small businesses. It’s difficult for a small business owner to cover their own health care costs, yet alone those of their employees.
Fortunately, there are some ways you can help contain your costs, and help out your employees as well: a Medical Expense Reimbursement Plan (also known as a “MERP”). While it doesn’t take all of the sting out of rising costs, it does provide you with a tax-free way to pay for medical expenses.
Here are some of the basics about the medical expense reimbursement plan, and why you should consider implementing one for your small business:
•The point of a medical expense reimbursement plan is to provide you and your employees with a tax break. Under a medical expense reimbursement plan, your business reimburses an eligible employee for medical expenses that they pay out-of-pocket. These benefits are pre-tax dollars, saving the patient significantly.
•MERPs have a tremendous amount of flexibility. As the employer, you can control eligibility requirements, what expenses qualify, and the maximum amount that can be reimbursed.
•A medical expense reimbursement plan is fully deductible for your company.
•With a MERP, you can combine a high-deductible medical insurance plan, allowing a number of expenses to be paid for by the MERP, including deductibles, co-payments and health-related expenses.
•As the employer, you can contribute a certain amount to the cost of the medical expense reimbursement plan. In some cases, you can also allow the employee to contribute a portion of their pay to the MERP. Both types of contributions are tax-free.
•Many companies use a MERP to cover ancillary health care services, such as dental or vision insurance, that aren’t normally covered by a group health care plan.
•Another term for medical expense reimbursement plan is the HRA – a Health Reimbursement Agreement.
•An employer can offer a MERP as a stand-alone plan, as well. In this type of arrangement, your employees can then purchase their own individual health care plans. This lets you offer a significant benefit to your employees, without having to get involved in the headaches and massive amount of detail involved in a medical insurance plan.
•A MERP differs from an FSA in that funds are not set aside ahead of time. There’s no minimum or maximum amount by law. With an FSA, you contribute funds to an account and have to use them by the end of the year, otherwise the funds are forfeited. With a medical expense reimbursement plan, this is not the case.
As you can see, a MERP offers a significant amount of flexibility to an employer.
MERP and your business structure
How you set up your MERP depends, to some degree, on how your business is structured.
If your business is a C Corporation, you can provide your employees with the ability to have qualifying medical expenses reimbursed. This is ideal for a company that has a smaller number of employees. You’ll create a MERP agreement that sets parameters for reimbursement (such as annual caps and more). Setting a cap is optional; if the C Corporation employs only you and your spouse, however, you probably don’t want to put a cap on the MERP.
You can also have a MERP if you run a Sole Proprietorship, or if you have a LLC with default taxation structure (i.e., it functions as a sole proprietorship for tax purposes). Unfortunately, with this structure, you can’t actually participate in the MERP; only your spouse may participate. That means a couple who runs a business is often better off incorporating, as they can take full advantage of the plan.
What can a MERP cover?
A MERP can cover a large number of medical and health-related expenses, including:
•Medical, vision, and dental insurance premiums
•Eyeglasses and contact lenses
•Medical assistance equipment, such as crutches, handicap accessibility equipment, hearing aids, and even braille books
•Psychiatric care and therapy
•Doctor-prescribed smoking cessation programs or weight loss programs
•Nursing home care
•And many more.
There are just a few items that don’t qualify for medical expense reimbursement plan expenses, such as cosmetic surgery, health club memberships, maternity clothing, or any illegal medical treatments, operations or medications.
Out-of-control medical expenses are a hardship on small business owners. Talk to your tax professional today about setting up a MERP, and help contain those costs while providing your business significant tax benefits.
[IMAGE CREDIT: Some rights reserved by 401K]