MERP: What a Medical Expense Reimbursement Plan Can and Cannot Do

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What a MERP Is — and Why the Name Causes Trouble

The difficulty is that MERP is an industry term rather than a statutory one. There is no section of the code called MERP, which means two people using the word are often describing different arrangements with different rules.

The useful simplification: a MERP is a health reimbursement arrangement. If you understand HRA compliance, you understand MERP compliance, because they are the same obligations wearing a different label.

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The Three Assumptions That Get Employers Into Trouble

That You Can Use One to Reimburse Individual Premiums

This is the most common misconception, and it predates the ACA. An employer reimbursing employees for individually purchased health insurance through a general-purpose arrangement fails the market reform rules, and the penalty exposure for getting it wrong is severe.

There are legitimate routes to the same outcome, but they are specific structures with their own conditions: an ICHRA for employers of any size, or a QSEHRA for employers under 50 full-time equivalents with no group plan. If the goal is defined contribution, those are the vehicles — not a MERP built for the purpose.

That You Can Offer One to Executives Only

Section 105(h) prohibits a self-insured arrangement from discriminating in favour of highly compensated individuals, in either who is eligible or what benefits they receive. An executive-only MERP generally fails that test. Because health plans cannot favor executives, many employers use insured executive benefits, such as supplemental disability and life coverage, to do that job instead.

What makes this particularly unpleasant is where the consequence lands. The plan is not invalidated and the employer is not fined — instead the excess reimbursements become taxable income to the executives. The people the arrangement was designed to benefit are the ones who receive the tax bill, usually a year or more later.

That It Sits Happily Alongside an HSA

A MERP that reimburses from the first dollar makes employees ineligible to contribute to a Health Savings Account, because they are no longer covered solely by a qualified high-deductible plan. If HSA eligibility matters to your workforce, the MERP has to be designed as post-deductible — reimbursing only after the statutory minimum deductible has been satisfied. Those minimums are published annually and are covered in our guide to the 2026 and 2027 HDHP and HSA limits.

How Employers Actually Use Them

Set against those constraints, the design that survives and does real work is deductible gap funding.

The employer moves to a higher-deductible group plan, which reduces premium. Part of the saving is then used to reimburse a portion of the deductible through the MERP. To the employee the coverage feels close to what it was. To the employer the difference is significant: a premium is paid for every enrolled employee every month regardless of use, while a deductible reimbursement is only paid when someone actually incurs the expense.

In a group where most employees are healthy in most years, that gap between what is funded and what is used is the entire economic case for the structure.

Design	Permitted For Active Employees	Typical Use
Integrated MERP or HRA (paired with the group plan)	Yes	Deductible or out-of-pocket gap funding
Post-deductible MERP	Yes	Gap funding while preserving HSA eligibility
Excepted-benefit HRA	Yes, within an annual cap ($2,200 in 2026; $2,250 in 2027)	Limited reimbursement alongside a group plan offer
ICHRA	Yes, under its own rules	Defined contribution toward individual coverage
QSEHRA	Employers under 50 FTEs with no group plan	Defined contribution for smaller employers
General-purpose standalone MERP	No	—

What Setting One Up Involves

• A written plan document and a Summary Plan Description — an ERISA requirement from the first covered employee, not at some later threshold.
• A substantiation process, so reimbursements are documented as qualified medical expenses rather than paid on request.
• A nondiscrimination review under Section 105(h) before launch, not after a year of reimbursements.
• COBRA administration, since the MERP is a group health plan with its own continuation rights.
• Coordination with the medical plan so the two are integrated rather than operating as separate arrangements.

We place and manage these arrangements and the vendors behind them; we are not the plan administrator, which means the substantiation, claims and COBRA mechanics sit with a partner whose job that is. If you are weighing a higher deductible against a reimbursement layer, the calculation worth doing first is against your own claims history — send us your renewal and we will model it.

Questions We Get

What is a MERP?

A Medical Expense Reimbursement Plan is an employer-funded arrangement that reimburses employees for qualified medical expenses on a tax-free basis under Internal Revenue Code Section 105. The term has no precise statutory definition, which is part of why it causes confusion.

Is a MERP the same as an HRA?

Functionally, yes. A MERP is a health reimbursement arrangement described by a different name, and the compliance obligations are the same — plan document, eligibility rules, qualified expense definitions, reimbursement limits, ERISA, COBRA and Section 105 nondiscrimination all apply identically.

Can a MERP reimburse individual health insurance premiums?

Generally not for active employees. An arrangement that reimburses individual premiums has to fit a recognised design — an ICHRA or a QSEHRA — each with its own eligibility conditions and rules. A general-purpose MERP used to reimburse individual premiums outside those structures fails ACA market reforms and can carry substantial excise tax exposure.

Can we offer a MERP only to executives?

This is the most common expensive mistake. Section 105(h) prohibits self-insured arrangements from discriminating in favour of highly compensated individuals. An executive-only MERP typically fails that test, and the consequence lands on the executives — their reimbursements become taxable income.

Does a MERP affect HSA eligibility?

It can. A MERP that pays from the first dollar generally disqualifies employees from contributing to an HSA alongside a qualified high-deductible plan. A post-deductible design, which only begins reimbursing once the statutory minimum deductible is met, preserves HSA eligibility.

What is a deductible gap MERP?

The most common current use. The employer offers a higher-deductible group plan, which lowers the premium, then reimburses part of the deductible through the MERP. Employees see something close to their old coverage, and the employer only funds the deductible that is actually used rather than paying the premium for it up front.

Is a MERP subject to ERISA and COBRA?

Yes. A MERP is a group health plan, so ERISA applies — including the requirement for a plan document and a Summary Plan Description — and COBRA continuation rights attach. Building the MERP as a component of the major medical plan rather than a free-standing arrangement usually simplifies all of this.

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Where the Rules Come From

The laws named in this article link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.