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Medical Reimbursement - Section 105

FAQs - Section 105 Plans

A plan set up by an employer to reimburse employees for their medical expenses that are not covered by their regular medical insurance is called a Medical Expense Reimbursement Plan. Reimbursable expenses might include deductible expenses, expenses in excess of policy limits, coinsurance, etc.

A Medical Expense Reimbursement Plan falls into Section 105 of the Internal Revenue Code. The goal of the Medical Expense Reimbursement Plan is for the employer to be able to save money. They do this by purchasing a high deductible health plan and using the savings to buy back a portion of the deductible.

How is the plan structured?
How does the plan work?
What are the requirements for Section 105 plans?
What are the non-discrimination requirements under Section 105?
What happens if the plan is discriminatory?
Who are highly compensated employees?
Is it true that a MERP can pay for other medical expenses?
Where can I use my Medical Expense Reimbursement Plan?
Is a MERP effective only for small businesses?
Should I allow an employee to administer this program for me?

Q: How is the plan structured?
A: The employer would select a higher deductible health plan. They then would decide how closely they would like to mimic their previous plan. The employer then decides, with the help of an advisor, how they would like the plan administered for their employees.

For example, the employer may have been able to offer a low deductible, say $250 to $500, to their employees in previous years. With the rise in health care costs, this type of plan is no longer viable for the employer. They decide to offer a $1,500 or $3,000 deductible, thus getting significant savings in the cost of their premium. The employer then buys back the deductible from his employees so that they are still only responsible for the first $250 or $500 of their deductible. Only a percentage of the employees will use their entire deductible so the employer's exposure is only that which is used. The end result is savings on premiums by moving to a high deductible health plan and continued employee satisfaction as the employee still only faces a $250 or $500 deductible.

Q: How does the plan work?
A: The employer sets up and maintains a separate bank account with the capability of check writing in the event a claim requires manual intervention. Funding arrangements are determined and agreed upon. Continuous monitoring of transactions assures that account money is spent wisely and properly.

The employer communicates with employees when necessary to verify transactions. Reporting to the employer and employees is provided as requested by the employer.

Employees are required to submit their Explanation of Benefits (EOB) from the insurance carrier to , Inc. in order to verify the eligibility of an expense.

Employees pay eligible medical expenses through the employer's system, with the maximum amount to be funded by the employer each plan year.

At the end of the plan year, the amount credited that is not spent belongs to the employer and can be used for future funding.

Q: What are the requirements for Section 105 plans?
The principal requirements to qualify under Section 105 are to adopt a written plan document, all participants must be employees, expenses to be reimbursed must not be subject to reimbursement under any health insurance policy, and the plan must meet the non-discrimination requirements specified under the Code. Because Section 105 medical reimbursement plans are considered group health plans, they are subject to the requirements for such plans under ERISA, COBRA, FMLA and HIPAA.

Q: What are the non-discrimination requirements under Section 105?
A: The plan must not discriminate in favor of highly compensated employees with respect to eligibility to participate or benefits provided under the plan. A plan discriminates as to eligibility unless it:

  1. Benefits 70% or more of all employees, or
  2. Covers 80% or more of eligible employees where 70% or more of them are eligible, or
  3. Covers a special classification of employees which the IRS determines not to be discriminatory. A group of employees described in IRC Section 410(b)(2)(A)(l) that is found to be a non-discriminatory classification in accordance with Prop. Treas. Reg. 1.410(b). For these purposes, there may be excluded from consideration any employees who have not completed three years of service, part-time employees whose customary weekly employment is less than 35 hours, employees covered by a collective bargaining agreement, and non-resident aliens.

A medical reimbursement plan will not discriminate as to benefits if the type and amount of benefits available to highly compensated participants and their dependents are also available on the same basis for all other participants and their dependents. This test is applied by looking at available benefits rather than actual benefit payments under the plan.

Q: What happens if the plan is discriminatory?
A: If the plan is discriminatory, then all or part of the medical benefits paid for the benefit of a highly compensated employee will be taxable to that employee.

Q: Who are highly compensated employees?
A: A highly compensated employee meets one of these tests:

  1. Is one of the five highest paid officers of the employer
  2. Is a shareholder who owns directly or indirectly more than 10% in value of the employer's stock
  3. Is in the top 25% of highest paid employees

Q: Is it true that a MERP can pay for other medical expenses?
A: Employers have assisted their workers pay for dental, vision plans, in-vitro fertilization and braces for their teenagers through MERP.

Q: Where can I use my Medical Expense Reimbursement Plan?
A: Generally any eligible medical provider.  You simply use the employer's system to pay for eligible expenses.

Q: Is a MERP effective only for small businesses?
A: No, these programs work for firms of all sizes. Many major corporations have already structured their health benefits plans so they have MERPs in place. We can meet with your human resources team and accountants to help them review the best way to provide a Section 105 plan for your company.

Q: Should I allow an employee to administer this program for me?
A: You may, but it's better to have a professional health benefits plan administrator handle this for your company. This lowers the likelihood of liability in the event that there is a dispute over providing health benefit coverage for your workers. An administrator can help you set up formal guidelines so that each employee is aware of the plan's scope of coverage. He or she can help each business owner understand how to effectively manage the program while meeting the federal guidelines set down for these programs.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM


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