Medical Expense Reimbursement Plan (MERP)

A back-end HRA under IRC Sections 105 and 106 that reimburses deductible-related medical expenses, often paired with a higher-deductible plan. Verification requires an EOB showing the expense was applied to the deductible.

See the Step-by-Step ProcessCommon Questions
Heads up: A MERP carries the same compliance load as a traditional HRA (written plan document, COBRA, Section 105(h) testing) plus a back-end EOB verification step, and the employer should never review employee medical claims directly because of HIPAA. Use a TPA. You should not try to run a MERP without professional support. For traditional HRAs open to a broader range of Section 213(d) expenses, see the HRA page.

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What A MERP is an employer-funded self-insured medical reimbursement plan under IRC Sections 105 and 106. It reimburses employees for medical expenses that apply to the plan deductible, and optionally coinsurance after the deductible, up to a plan-defined annual maximum. The employer sets the minimum deductible threshold that must be met before MERP reimbursement begins. Funds are employer-funded only; employees make no contributions. For traditional HRAs open to a broader range of Section 213(d) expenses, see the Health Reimbursement Arrangement (HRA) page.
Who Any employer, regardless of size. Commonly used by employers who want to reduce the sting of a high-deductible health plan for employees without returning to a low-deductible plan. Because the MERP is limited to deductible-related expenses, claim volume is lower than a traditional HRA, making administration somewhat more manageable, though still not DIY.
When The written plan document must be adopted before any reimbursements are made. COBRA general notices must go to new participants; COBRA election notices must be sent promptly after qualifying events. Section 105(h) nondiscrimination compliance should be reviewed annually.
Risk Operating without a written plan document, reimbursing expenses that have not cleared the MERP's minimum deductible threshold, failing COBRA obligations, failing Section 105(h) nondiscrimination requirements, or allowing the employer to directly review employee medical claims and EOBs (HIPAA). If Section 105(h) testing fails, highly compensated individuals lose the tax exclusion; reimbursements become taxable income for them. Use a TPA to keep PHI out of the employer's hands.
Before
First reimbursement

The signed plan document must be in place before any MERP payments are made. No retroactive adoption.

14
COBRA election days

The plan administrator has 14 days to send the COBRA election notice after the employer notifies the plan.

Annual
105(h) review

Confirm the plan satisfies the Eligibility and Benefits Tests; mid-year review is recommended.

Event Timing Notes
Plan document adoption Before first reimbursement No retroactive adoption. The plan document must be in signed, written form before any MERP payments are made. Define the plan year, eligibility, deductible threshold, maximum reimbursement, and claims procedures.
COBRA general notice Within 90 days of becoming covered A MERP is a group health plan subject to COBRA. New participants must receive the general COBRA notice within 90 days of first being covered by the plan. Typically coordinated through your health plan's COBRA administrator.
COBRA election notice Within 14 days of qualifying event notice When a qualifying event occurs (termination, reduction in hours, etc.), the plan administrator has 14 days to send the COBRA election notice after the employer notifies the plan. Employees have 60 days to elect. COBRA continuation of a MERP must be coordinated with the underlying health plan.
Section 105(h) nondiscrimination review Annually No IRS filing required, internal review only. Confirm the plan satisfies both the Eligibility Test and Benefits Test under Section 105(h). Mid-year review is recommended so you have time to make corrections before year-end.
Claims run-out period Per plan terms (typically 60-90 days after plan year end) The window after the plan year during which participants may submit EOBs for expenses incurred during the plan year. Must be defined in the plan document.
Annual plan review Before each new plan year Review the MERP's deductible threshold, maximum reimbursement, and eligible expense definition in light of any changes to the underlying health plan. Amend the plan document if any terms change.
Event: Plan document adoption
Timing: Before first reimbursement
Notes: No retroactive adoption. Define plan year, eligibility, deductible threshold, maximum, and claims procedures.
Event: COBRA general notice
Timing: Within 90 days of becoming covered
Notes: A MERP is a group health plan subject to COBRA. Coordinate with your COBRA administrator.
Event: COBRA election notice
Timing: Within 14 days of qualifying event notice
Notes: Employees have 60 days to elect. Coordinate continuation with the underlying health plan.
Event: Section 105(h) nondiscrimination review
Timing: Annually
Notes: Internal review only. Confirm the Eligibility and Benefits Tests; mid-year is recommended.
Event: Claims run-out period
Timing: Typically 60-90 days after plan year end
Notes: Window to submit EOBs for expenses incurred during the plan year. Define it in the plan document.
Event: Annual plan review
Timing: Before each new plan year
Notes: Review threshold, maximum, and eligible expenses; amend the plan document if terms change.
  • Written MERP plan document: Required under IRC Section 105. Must specify the plan year, covered employees, the MERP's minimum deductible threshold (the point at which MERP reimbursement begins), the maximum annual reimbursement, eligible expense categories (deductible-related charges, coinsurance, or both), claims submission procedures, and the run-out period. An attorney familiar with employee benefits should review the document.
  • Summary Plan Description (SPD): ERISA requires participants to receive an SPD. For smaller employers, the plan document often doubles as the SPD. Provide to each participant when they first become eligible and redistribute when material changes are made.
  • Underlying health plan's Explanation of Benefits (EOB) structure: Because MERP reimbursement depends on how the health plan applies claims to the deductible, you need to understand how your carrier generates EOBs, specifically, whether they clearly indicate the amount applied to the deductible. This affects your TPA's ability to verify the MERP threshold has been met.
  • TPA agreement: A third-party administrator handles EOB review, tracks each employee's deductible accumulation against the MERP threshold, and processes reimbursements, without exposing PHI to the employer. Have the TPA agreement in place before the first claims are received.
  • Employee census (for Section 105(h)): A roster showing all employees, their compensation, officer status, and ownership percentage. Used to classify highly compensated individuals (HCIs) for the annual nondiscrimination review.
  • COBRA administration arrangement: Because the MERP is a group health plan, COBRA rights must be offered. Confirm that your health plan's COBRA administrator is aware of the MERP and will include it in qualifying event notices, or arrange separate COBRA administration.

Part A: Plan Design and Setup

1
Define the deductible thresholdThe MERP's minimum deductible threshold is the amount the employee must first pay out-of-pocket under the underlying health plan before the MERP begins reimbursing. For example, if the health plan has a $2,000 deductible and the employer sets a $500 MERP threshold, the MERP covers deductible expenses from $500 to $2,000 (or up to the plan's annual maximum). The threshold and maximum reimbursement limit should reflect both the employer's cost goals and the underlying plan's cost-sharing structure.
2
Define covered expensesMost MERPs limit reimbursements to amounts applied to the plan deductible and coinsurance after the deductible. Decide whether to include coinsurance and whether to limit coverage to in-network charges only. Document these decisions in the plan document.
3
Draft the plan documentWork with an ERISA attorney or experienced benefits consultant to draft the written plan document. The MERP must be structured as a self-insured medical reimbursement plan under IRC Section 105 and Treas. Reg. 1.105-11. The document must exist before any reimbursements are made.
4
Engage a TPABecause EOB review requires access to employee medical claims information, protected health information under HIPAA, the employer should not be the one reviewing EOBs directly. A TPA acts as the intermediary, verifying that the MERP threshold has been met and processing reimbursements without routing PHI through the employer. This is not optional as a practical matter; it's a HIPAA risk management necessity.
5
Coordinate with the health planNotify your group health insurance carrier or plan that a MERP is in place. Confirm how EOBs will be routed to the TPA. Make sure COBRA notices will reflect the MERP as a separate group health plan coverage option.
6
Communicate the plan to employeesDistribute the SPD and explain how the MERP works: when reimbursement starts, what documentation they need to submit, and how to submit EOBs to the TPA. Employees need to understand that a MERP reimbursement requires an EOB, not just a receipt, and that the EOB must show the expense was applied to the deductible.

Part B: Ongoing Administration

1
Receive and process EOB-based claimsWhen an employee submits a claim, the TPA reviews the EOB to confirm: (a) the expense is a covered category under the plan, (b) the expense was applied to the plan deductible by the health plan carrier, and (c) the MERP's minimum deductible threshold has been met for that employee for the plan year. Only after all three conditions are satisfied does the TPA process reimbursement.
2
Track deductible accumulation per employeeThe TPA should maintain a running total of each employee's year-to-date deductible accumulation to determine when the MERP threshold is crossed and when the annual maximum is reached.
3
Process COBRA events promptlyWhen an employee terminates or has another qualifying event, notify your COBRA administrator immediately. The MERP must be included in the COBRA election notice. Former employees who elect COBRA can continue MERP coverage by paying the applicable premium (typically the employer's cost plus a 2% administrative fee).
4
Run the Section 105(h) nondiscrimination review annuallySee the Nondiscrimination Testing section below. Document the results each year.
  • Summary Plan Description: ERISA requires an SPD to be provided to each participant within 90 days of first being covered. Distribute to new employees when they become eligible. Provide an updated SPD or Summary of Material Modifications (SMM) when the plan terms change materially.
  • COBRA notices: A MERP is a group health plan. The initial COBRA general notice must be provided within 90 days of first coverage. COBRA election notices must be sent within 14 days of the plan administrator receiving notice of a qualifying event. Failure to provide timely COBRA notices exposes the employer to statutory penalties of up to $110 per day per qualified beneficiary.
  • EOB-based reimbursements: MERP reimbursements are triggered by EOBs, documents issued by the health plan carrier explaining how a claim was processed and how much was applied to the deductible. Employees submit EOBs to the TPA (not the employer). The TPA verifies that the MERP's minimum deductible threshold has been met before issuing reimbursement. A plain medical receipt is not sufficient substantiation for a MERP; the EOB showing deductible application is required.
  • No debit cards: MERPs do not use debit cards. Because MERP reimbursement depends on confirming the deductible threshold has been cleared, which requires EOB review, there is no mechanism for a point-of-sale debit transaction. Reimbursements are paid after the fact, directly to the employee, following EOB-based verification.
  • HIPAA firewall: The employer should not see individual employee EOBs or medical claim details. Route all EOB submissions to the TPA, not to HR or payroll. This is a HIPAA compliance requirement: individually identifiable health information is PHI, and employer access to PHI in the context of claims adjudication requires a specific Business Associate Agreement and creates significant liability.
  • Plan document and amendmentsKeep the original signed plan document and all amendments permanently. At minimum, retain for the life of the plan plus 6 years.
  • SPD and distribution recordsRetain a copy of each SPD version, the date it was adopted, and evidence that it was distributed to participants (e.g., distribution log, email confirmation, or acknowledgment forms). Retain for at least 6 years.
  • EOBs and reimbursement recordsThe TPA should retain all EOBs submitted by participants and the corresponding reimbursement records showing the deductible accumulation verification. These records demonstrate that each reimbursement was properly substantiated (deductible threshold met, expense was covered). Retain for at least 6 years. The employer should retain records of reimbursement amounts paid to employees for payroll reconciliation and W-2 purposes.
  • COBRA recordsRetain copies of all COBRA notices sent (general notices and election notices), qualified beneficiary election forms, premium payments received, and COBRA termination notices. Retain for at least 6 years after the end of the plan year in which the COBRA event occurred.
  • Section 105(h) nondiscrimination documentationKeep a written record of the annual Section 105(h) review: employee census data used, HCI classifications, test inputs, and test results. Retain for at least 6 years.
  • Note on PHITo the extent the TPA retains EOBs on the employer's behalf under a Business Associate Agreement, the employer should ensure the BAA specifies the TPA's data retention and destruction obligations. The employer itself should not maintain a repository of individual employee medical claim data.

Because a MERP is a self-insured medical reimbursement plan under IRC Section 105, it must satisfy the nondiscrimination requirements of Section 105(h). These rules are designed to prevent employers from offering more favorable benefits to highly compensated individuals (HCIs) than to rank-and-file employees.

Who Is an HCI?

Under Section 105(h), highly compensated individuals are: the five highest-paid officers; any shareholder owning more than 10% of the employer's stock (by value); and any employee among the highest-paid 25% of all employees. Note that the Section 105(h) HCI definition differs from the HCI definition used in Section 125 cafeteria plan nondiscrimination testing.

The Two Section 105(h) Tests

  • Eligibility Test: The plan must benefit a broad enough group of non-HCI employees. Specifically, the plan must benefit: (a) 70% or more of all non-excludable employees; (b) 80% or more of all employees who are eligible to benefit, provided 70% or more of all employees are eligible; or (c) a classification of employees found not to discriminate in favor of HCIs by the IRS. An employer cannot offer the MERP to HCIs only, or to a classification that effectively covers only executives and officers.
  • Benefits Test: All benefits provided to HCIs must be available on equal terms to non-HCI participants. The plan cannot cap reimbursements at a lower amount for rank-and-file employees, or impose stricter eligibility conditions on non-HCIs. The MERP's deductible threshold, annual maximum, and covered expense categories must apply uniformly.

Consequence of Failure

If either test fails, the tax exclusion is lost for HCIs only; rank-and-file employees are not affected. The amount that is discriminatory becomes taxable income for the affected HCIs and must be reported on their W-2s. Consult your benefits counsel or TPA for guidance on testing and corrective action if a test fails.

  • Reimbursing before the threshold is met: The most common MERP administration error. If the plan document says the MERP begins reimbursing after the first $500 of deductible expenses, and the TPA reimburses a $300 claim before the employee has accumulated $500 in deductible charges, that reimbursement is not valid under the plan terms and may not be tax-exempt. Make sure the TPA's tracking process enforces the threshold rigorously.
  • EOB not showing deductible application: Sometimes a provider submits a claim that the carrier processes as not-covered or out-of-network, and the EOB does not show the amount being applied to the in-network deductible. In these cases, the TPA may need to request a corrected EOB or additional documentation. Train employees to submit EOBs promptly, and to contact the TPA if the EOB is unclear.
  • MERP and HSA incompatibility: A MERP is a general-purpose health reimbursement arrangement. If an employee is enrolled in a MERP that reimburses any deductible expenses before the statutory HDHP minimum deductible is exhausted, that employee is disqualified from contributing to an HSA. If you offer both an HDHP and a MERP, confirm with your benefits counsel how to structure the MERP threshold to avoid disqualifying employees' HSA eligibility.
  • Failure to include MERP in COBRA: Because a MERP is a separate group health plan, it must be included in COBRA election notices independently of the medical plan. Some employers assume the medical plan's COBRA administrator handles everything, but the MERP must be specifically listed as a coverage option that qualifying beneficiaries can elect to continue.
  • Integration with other HRA or FSA arrangements: A MERP cannot be combined with a traditional HRA in a way that allows double reimbursement of the same expense. If employees have access to both a MERP and another account-based health plan, the plan documents must include coordination of benefits language to prevent the same expense from being reimbursed twice.
  • Termination of coverage mid-year: When an employee terminates employment, their MERP coverage ends (subject to COBRA election). Expenses incurred before the termination date, and within the run-out period, may still be eligible for reimbursement. The plan document must define the run-out period clearly so the TPA can properly close out terminated employees' accounts.

Can employees contribute to the MERP?

No. MERPs are funded entirely by the employer. Employees cannot make pre-tax or after-tax contributions. This distinguishes a MERP from an FSA or HSA, where employee contributions are a core feature.

What's the difference between a MERP and a traditional HRA?

Both are employer-funded plans under IRC Section 105. A traditional HRA can be designed to cover any Section 213(d) eligible medical expense and typically makes funds available up front at the start of the plan year. A MERP is specifically a back-end arrangement; it reimburses only deductible-related expenses, and only after the employee's deductible threshold has been met. A MERP is not open to all Section 213(d) expenses by design.

Why is an EOB required instead of a medical receipt?

Because MERP eligibility depends on the expense having been applied to the plan deductible, not just that it was a medical expense. A receipt shows what was paid; an EOB shows how the health plan carrier processed the claim and how much was credited toward the deductible. Without the EOB, there is no way to verify that the MERP's deductible threshold has been crossed.

Does COBRA apply to a MERP?

Yes. A MERP is a group health plan and is independently subject to COBRA. When a qualifying event occurs, the MERP must be listed as a separate line of coverage that qualified beneficiaries can elect to continue. The COBRA premium for MERP continuation is typically the employer's annual cost for that employee plus a 2% administrative fee.

Can a MERP be offered to just some employees?

Yes, but Section 105(h) nondiscrimination requirements restrict how. The plan must pass the Eligibility and Benefits Tests under Section 105(h), meaning it must cover a broad enough group of non-highly-compensated employees on equal terms. You cannot offer a MERP only to executives or officers.

Does a MERP require a Section 125 cafeteria plan?

No. A MERP is an employer-funded HRA arrangement, not a salary reduction plan. It does not require a Section 125 cafeteria plan because employees are not making pre-tax elections. The employer simply establishes the MERP as a benefit and funds it directly.

How does a MERP interact with an HSA?

Carefully. If the MERP reimburses any general medical expense before the statutory HDHP minimum deductible is met (for 2026: $1,700 individual / $3,400 family; for 2027: $1,750 / $3,500), the employee is disqualified from contributing to an HSA for that period. To offer both a MERP and HSA eligibility, the MERP's deductible threshold must be set at or above the applicable HDHP minimum deductible, essentially making the MERP available only for amounts that would not disqualify HSA eligibility. Work with your benefits counsel to structure this correctly.