MERPs are not a Section 125 plan, cafeteria plan, or flexible spending account. They are designed to be more like an HRA.  A MERP is a form of self-insurance.  There is nothing in a MERP that would qualify an EMPLOYEE for receiving an increase in after-tax income as it could in the JKB Consulting Group's Section 125 Healthcare plan.  Section 125 is the code under which the JKB Consulting Group's Section 125 Healthcare Plan is built, but Section 125 itself does not provide for the fully insured benefits and potential increased net paycheck by itself. 

 

Understanding MERPs

MERP Plans are sanctioned under Section 105 of the IRC.  A MERP is a type of Health Reimbursement Arrangement (HRA) that enables employers to fund portions of their employees’ health plan deductibles, coinsurance, or copayments, as well as cover the cost of other qualified medical expenses on a tax-free basis. MERP plans are commonly utilized with higher deductible plan designs, giving the employer the flexibility to create any plan design they would like. By purchasing a higher deductible health plan, an employer and their employees can benefit from the premium savings but utilizing the MERP allows the employer to continue offering a quality benefits package to employees.  Therefore, are mostly tied to employer health plans.  

 

MERP plans were designed for an employer to start controlling their health plan costs year after year. There is no physical account linked to a MERP Plan, as there may be with an HRA, the employer only reimburses for expenses after they have been incurred as they are presented and only if they are presented.

Under a typical MERP situation, let’s use an easy example to walk through the process.

 

ABC Employer is currently paying extremely high premiums to offer a $500/$1,000 Deductible plan to their employees. After learning about the MERP Plan, they decide to purchase a $5,000/$10,000 Deductible Plan, but still offer the $500/$1,000 to their employees; ABC Employer will be funding the difference between the Employee deductible to the purchased plan deductible, $4,500/$9,000.

John Jensen, an employee of ABC Employer, has a surgery that costs $15,000, since he is under the $5,000 Deductible, his responsibility would be $5,000. After the surgery, John receives an Explanation of Benefits (EOB) from the insurance company that says his responsibility is $5,000. John sends the EOB to the MERP manager, and they process the claim and send him reimbursement for $4,500 since he is responsible for the first $500 of deductible. John will then receive a bill from the provider for $5,000 which he will then pay with the reimbursement from the company and his additional $500.  Can also accommodate an employee’s share of health premiums.

 

Benefits of MERPs

Tax Savings.  Reimbursements to employees are tax-exempt, and contributions made by the employer are tax-deductible business expenses.  However, a tax deduction can only be claimed by the employer once a claim has been reimbursed.

 

Flexibility.  Funds can be used to pay for a variety of medical expenses not covered by the health plan including deductibles, copayments, prescriptions, coinsurance, dental, and vision care.  Employers can create any plan underneath the window of the purchased plan.  This gives the employer flexibility at targeting highly utilized portions of their current health plan to incent employees to become better consumers.

 

Control.  The employer decides exactly how much money will be available to employees and how it will be disbursed.  The employee’s responsibility and cost-sharing are completely designed by each employer, with no carrier or TPA intervention telling you what you can and cannot do.

Common issues surrounding a traditional HRA

• HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan.

• Premium equivalent rates cannot be used to set employee contributions because the result is assumed that a salary reduction is attributed to the HRA funding.

• An employer may not purchase one underlying health plan, have two different reimbursement arrangements (e.g., high/low), and charge different rates for the high and low plans. This is because a portion of the salary reduction is attributed to an increased maximum reimbursement amount of the coverage period.

​

Advantages of a Self-Funded MERP

• Allows employee contributions to go towards the plan.

• Premium equivalent rates can be used to set employee contributions.

• Allows an employer to purchase a single underlying plan offering and create multiple funding arrangements to create multiple plan design offerings. Employers can set different contribution levels accordingly.

 

Both methods can be and are commonly used to help mitigate health insurance costs.  Both allow an employer to self-insure a portion of the deductible they feel comfortable with, creating savings from leveraging cheaper plans (high deductibles) from the carrier, however, MERPs offer a bit more flexibility.

 

What is Section 125 Healthcare Plan?

First, a Section 125 is a written plan that lets employees choose between two or more benefits, including qualified benefits (e.g., health insurance) and cash.  Employees receive benefits as pre-tax deductions.

 

Employees, their spouses, and their dependents can all benefit from section 125 plans.

 

Think of a 125 plan like a cafeteria. In a cafeteria, individuals can pick the foods they want from the selection offered. Similarly, employees can pick the benefits they want in a section 125 plan. This is why a section 125 benefit plan is also called a cafeteria plan.

 

A section 125 plan gives pre-tax benefits to employees. With pre-tax benefits, you deduct the employee’s contribution before withholding taxes, reducing their taxable income. Typically, with pre-tax deductions, the employee pays less in federal income and FICA (Social Security and Medicare) taxes. Some states also allow a section 125 plan to reduce the amount an employee owes in state income taxes. 

 

Because section 125 plans are pre-tax, they also come out before federal unemployment tax (FUTA), reducing the employer's FUTA liability per paycheck. The tax remains 6% (or 0.6% if you receive the credit) on the first $7,000 of an employee’s wages. However, the pre-tax deduction reduces the taxability of each check. So, you pay less FUTA tax per check than you would without a section 125 plan. 

 

In some states, you also calculate state unemployment tax (SUTA) after the section 125 plan, which reduces the employer's SUTA tax liability per check. 

​

Advantages of the JKB Consulting Group's Section 125 Healthcare Plan

JKB Consutling Group's Section 125 Healthcare Plan is a fully insured product that works seamlessly with any other employer group healthcare benefits plan (including, self-funded/level-funded) for W-2 employees.  With our Section 125 Healthcare Plan, the insurance carrier bears the risk in lieu of the employer.  With a MERP, the employer bears the entire risk.

​

By an employer electing the JKB Consulting Group's Section 125 Plan over a MERP, there is no such thing as indemnification from the IRS.  The MERP plan sponsor would bankrupt the company before paying the penalty to the IRS.

 

With the JKB Consulting Group's Section 125 Healthcare Plan, the employee is NOT forced to use the additional money created for them to buy other products.  We do avail employees the opportunity to utilize the extra dollars added to their paycheck to fill any gaps that might be present in their current healthcare plan, but employees have the choice of how these dollars are spent - not forced as in the case with a MERP.

​

ALL employees (full and part-time) can participate in the JKB Consulting Group's Section 125 Healthcare Plan without being enrolled in a health insurance plan.  Any employee can take advantage of the healthcare benefits provided, including the financial and tax savings benefits too.  The FICA tax savings an employer receives from each employee enrolled offsets the costs of offering an ACA compliant MEC (Minimum Essential Coverage) plan that kills two birds with one stone: 1) Employers meet the MEC mandate; and 2) Employers' MEC costs are fully covered with no outlay from their bottom line.

​

One of the greatest advantages for an employer of the JKB Consulting Group's Section 125 Healthcare Plan is the valuable tax savings incurred.  Employers with W-2 employees who are needing to meet ACA compliance take advantage of this Section 125 plan to offset Minimum Essential Coverage (MEC) plan costs.  By doing so, employers are able to provide for their employees a robust ACA-compliant healthcare plan without any net financial outlay.  

​

Schedule a plan review and proposal TODAY!  

​

​

​