A Medical Expense Reimbursement Plan, or MERP, is an employer-funded health benefit that pays employees back for out-of-pocket medical costs up to a set annual allowance, with the reimbursements coming through tax-free. Instead of buying an insurance policy to cover those costs, the employer self-insures: money comes directly from company assets, the plan document controls what’s eligible, and claims are paid as they’re submitted. That structure is what makes a MERP plan attractive on both sides of the paycheck. The employer deducts every dollar contributed as a business expense, and the employee gets the reimbursement without federal income tax or payroll tax touching it.
How the Plan Is Funded and Structured
Every MERP runs off a written plan document, which federal law requires for any employer-sponsored benefit. The document sets the annual reimbursement cap per participant, defines eligible expenses, and lists who can join. Because the employer pays claims from its own funds rather than through an insurance carrier, the plan sits in the “self-insured” category under federal rules.
Employers decide the allowance amount each year and can vary it by employee class, such as full-time versus part-time. The reimbursement cycle is also the employer’s choice: monthly, quarterly, or rolling as claims come in.
One design point worth checking in your own plan: whether unused funds carry over. Federal law is silent on this, so it’s the employer’s call. Some MERPs let balances roll forward indefinitely, some allow a partial rollover, and others operate use-it-or-lose-it. If you’re enrolled, look at the plan document before year-end so you know what happens to anything unspent.
Which Medical Expenses Qualify
The outer boundary comes from the IRS. Publication 502 lists the medical, dental, and vision costs that can be reimbursed tax-free, and most MERPs draw their eligible-expense list straight from it.1Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses Common reimbursable items include:
- Deductibles, copayments, and coinsurance not covered by your primary health plan
- Dental work, including cleanings, fillings, extractions, braces, and dentures
- Vision care, including eye exams, prescription glasses, and contact lenses
- Lab fees, X-rays, and medical imaging
- Prescription drugs
Since 2020, over-the-counter medications and menstrual care products are reimbursable without a prescription under changes made by the CARES Act.2Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act A MERP doesn’t have to cover everything the IRS allows, though. The plan document controls, and any category the employer left out is out of pocket for you.
Who Can Participate
Employers define eligible groups in the plan document using categories such as full-time status, job location, or length of service. The classifications have to rest on real business distinctions, not on cherry-picking individuals.
Coverage typically extends to a spouse and dependents. Children remain eligible through the end of the calendar year in which they turn 26, whether or not they’re students or married.3Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans Section 105(b) permits tax-free reimbursements for the medical expenses of any child who hasn’t turned 27 by year-end.
Some employers set up MERPs mainly for retirees, contributing during working years so the retiree can draw on the accumulated balance for Medicare supplement costs and other medical expenses later. The same tax treatment applies.
Tax Treatment on Both Sides
For employees, employer contributions to a MERP are excluded from gross income under Internal Revenue Code Section 106.4Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans The money set aside for your plan doesn’t show up as taxable wages. When a reimbursement is actually paid for a qualifying expense, Section 105(b) keeps that tax-free as well, so no federal income tax and no payroll taxes apply.
For employers, every dollar contributed is deductible as an ordinary business expense under Section 162.5Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses MERP contributions are also exempt from the employer’s share of FICA, which makes them more tax-efficient than a raise of equivalent value.
Nondiscrimination Rules
Because a MERP is self-insured, Section 105(h) of the Internal Revenue Code applies two tests to make sure the plan doesn’t disproportionately favor highly compensated employees.3Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
- The eligibility test asks whether a broad enough slice of the workforce is covered. A plan limited to owners, officers, or top earners fails.
- The benefits test asks whether the reimbursements actually paid out skew toward highly compensated employees. If executives are receiving much larger reimbursements than rank-and-file workers, the plan fails.
For 2026, an employee counts as highly compensated if they earned more than $160,000 in the prior year or own at least 5% of the company.6Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs When a plan fails either test, highly compensated participants lose the tax exclusion and have to include their MERP reimbursements in gross income. Rank-and-file employees keep tax-free treatment either way, so the penalty lands on the people the plan was improperly favoring.
Filing a Claim
To get reimbursed, submit a claim to the plan administrator with documentation showing the expense qualifies. Standard proof is an Explanation of Benefits from your insurance carrier or an itemized receipt showing the date of service, the treatment, and what you paid out of pocket.
Most plans set a filing deadline, often a 90-day window after the end of the plan year, though employers can go longer or shorter. Miss the deadline and you generally forfeit that reimbursement, so it pays to submit as expenses come in rather than batching everything for December.
If a claim is denied, federal law gives you at least 180 days to appeal.7U.S. Department of Labor. Benefit Claims Procedure Regulation FAQs The plan must give you a written denial that spells out the specific reason and describes the appeal procedure.
The ACA Trap for Standalone Plans
A MERP that supplements an employer’s group health plan generally fits within the Affordable Care Act framework. The problem is a standalone MERP that reimburses individual health insurance premiums or medical expenses without being integrated with a group health plan meeting ACA market reforms.
A standalone arrangement that fails ACA requirements triggers an excise tax of $100 per day per affected employee under Section 4980D of the Internal Revenue Code.8Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements That’s $36,500 per employee per year.9Internal Revenue Service. Employer Health Care Arrangements Any employer setting up a MERP that isn’t paired with a group health plan needs to structure it carefully or use one of the approved reimbursement arrangements described below.
MERPs and Health Savings Accounts
A standard MERP that reimburses general medical expenses disqualifies an employee from contributing to a Health Savings Account. The IRS treats a general-purpose MERP as “other health coverage” that ends HSA eligibility, even for an employee enrolled in a high-deductible health plan.
Two designs let a MERP and HSA coexist:10Internal Revenue Service. Health Savings Accounts and Other Tax-Favored Health Plans
- A limited-purpose MERP reimburses only dental, vision, and preventive care. Those categories sit outside the HDHP deductible structure and don’t affect HSA eligibility.
- A post-deductible MERP reimburses broader medical expenses but only after the employee has met the statutory minimum HDHP deductible. For 2026, those minimums are $1,700 for self-only coverage and $3,400 for family coverage. Expenses incurred before the employee reaches that threshold are not eligible.11Internal Revenue Service. Revenue Procedure 2025-19 – HSA and HDHP Limits for 2026
Timing matters. Expenses are considered incurred when the service is performed, not when the bill arrives or when you pay it. If you have a January doctor visit and hit your deductible in March, that January expense isn’t reimbursable through a post-deductible MERP.
How a MERP Compares to an ICHRA and a QSEHRA
A traditional MERP isn’t the only employer-funded reimbursement option. Two newer arrangements serve different situations.
- An Individual Coverage HRA (ICHRA) is available to employers of any size and reimburses employees for individual health insurance premiums and medical expenses. Employees have to buy their own individual policy meeting minimum essential coverage standards. There’s no federal cap on the employer contribution. ICHRAs work when an employer wants to exit the group health plan business and let employees pick their own coverage.
- A Qualified Small Employer HRA (QSEHRA) is limited to employers with fewer than 50 full-time employees that don’t offer a group health plan. Employees must carry minimum essential coverage to receive tax-free reimbursements. For 2026, the maximum reimbursement is $6,450 for self-only coverage and $13,100 for family coverage.
- A traditional MERP works alongside an existing group health plan to cover gaps like deductibles and copayments. Employees don’t need separate individual coverage. There’s no federal cap on employer contributions, and the employer has broad flexibility in plan design.
The choice usually turns on whether the employer already offers group health insurance. If so, a traditional MERP supplements that coverage. If the employer wants employees to shop for individual plans, an ICHRA fits. Small employers with no group plan often default to a QSEHRA for its simpler compliance rules, though the contribution caps are a real constraint if the goal is generous benefits.