What is a MERP (Medical Expense Reimbursement Plan)?

MERP definition

A Medical Expense Reimbursement Plan (MERP) is an IRS Section 105 arrangement through which an employer reimburses employees, tax-free, for qualified medical expenses. "MERP" is a general, older term — today, most MERPs are structured as Health Reimbursement Arrangements (HRAs), including ICHRA and QSEHRA.

How a MERP works

• The employer sets up the plan and decides what it reimburses and how much.
• Employees incur eligible medical expenses (and, for some plans, premiums).
• Employees submit documentation; the employer reimburses tax-free.
• The plan is governed by IRS Section 105 and requires a plan document and substantiation.

MERP vs HRA — what''s the difference?

They overlap heavily. "MERP" is the older, broad label for any Section 105 medical-reimbursement plan; "HRA" refers to the specific, modern frameworks (ICHRA, QSEHRA, integrated HRAs) that current regulations define. For most small employers today, choosing a MERP means choosing an ICHRA or QSEHRA.

The Section 105 basis

Every MERP rests on Section 105 of the Internal Revenue Code, the provision that lets employers reimburse medical costs without that money being taxed. So a MERP and a Section 105 plan are essentially the same idea described two ways — and HRAs are the regulated modern form they take.

The forms a MERP takes today

• ICHRA — reimburses individual coverage; any size; no cap.
• QSEHRA — small employers under 50; capped.
• Integrated HRA — pairs with a group plan; reimburses out-of-pocket costs.
• Self-funded Section 105 plans — sometimes used in specific owner or small-group setups.

Who uses a MERP

Small businesses reimbursing employees for individual coverage (via ICHRA or QSEHRA), employers supplementing a group plan with an integrated HRA, and certain owner setups (for example, a Section 105 plan covering a spouse-employee), subject to entity rules. The right structure depends on size, whether you keep a group plan, and your goals.

Staying compliant

A MERP needs a written plan document, nondiscrimination compliance, and substantiation of expenses to keep reimbursements tax-free. A broker or administrator handles this — and in practice sets you up with the specific HRA (ICHRA or QSEHRA) that fits, rather than a generic MERP.

MERPs and the ACA

A medical expense reimbursement plan is a Section 105 concept, and for active employees it must fit within an approved framework — an ICHRA, QSEHRA, or excepted-benefit HRA — to comply with ACA market rules. A standalone MERP that simply reimburses individual premiums for active employees generally is not compliant on its own.

The self-employed spouse strategy

One well-known small-business use of a MERP is employing a spouse as a bona fide employee and reimbursing the family's medical expenses through the plan. It can be effective in the right situation, but it carries strict requirements around genuine employment and documentation, so set it up with professional help.

MERP documentation

Like any HRA, a compliant MERP needs a written plan document, a substantiation process, and retained records. That paperwork is what keeps the reimbursements tax-free and defensible if questioned.