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Why The Difference Card Uses a MERP to Build Custom Plan Designs

September 22, 2021

Understanding the Advantages of a Medical Expense Reimbursement Plan (MERP)

Have you been in the business of employee benefits for at least a couple of years?  

Then you probably have some experience with the variety of tax-advantaged consumer benefit accounts permissible under IRS regulations.  Some employers allow their workers to direct payroll deductions into an FSA to cover certain medical expenses on a pre-tax basis.  Others offer to purchase transit passes on behalf of employees and take advantage of funding accounts to capture tax advantages for doing so.  

Lesser well known is the Medical Expense Reimbursement Plan, or MERP.  A MERP is not a part of a standard benefits offering, but a MERP can be a valuable tool to achieve a variety of employer health plan objectives, such as cost and tax savings.  

This article defines a MERP, describes the rules governing its usage, as well as details several scenarios where a MERP might be an employer’s preferred approach for health plan design, implementation, or renewal.  

What is a Medical Expense Reimbursement Plan (MERP)?

According to the IRS, “The term self-insured medical reimbursement plan means a plan of an employer to reimburse employees for expenses referred to in subsection (b) for which reimbursement is not provided under a policy of accident and health insurance.”  

In contrast, the most succinct and readable definition is as follows:  “MERPs are employer-funded arrangements that reimburse qualified medical expenses and are typically offered in conjunction with high deductible insurance policies.”

We operate in a market where cost-advantaged alternatives to traditional medical insurance programs abound. The MERP is an option among a solution set that includes pooled arrangements such as PEOs and captives, an expanding spectrum of permissible HRA types, Archer MSAs, and 100% self-insurance transferring all risk from carrier to employer.  MERPs can be thought of as a type of, or step toward, self-insurance.

How Does a MERP Work?

Let’s first discuss the basic mechanics of a MERP program, before getting into how to pair it with a Group Medical Insurance Plan. The employer will begin by specifying how the reimbursement should be paid out.  A very simple reimbursement structure would allocate a flat dollar maximum amount to be spent by the employee and eligible dependents on any items on the IRS 213-d schedule within a calendar year.  

A more complicated reimbursement structure could allocate certain dollar amounts or percentages to specific procedures or categories.  Once defined and implemented, typically with an outside administrator like The Difference Card, the plan becomes available for use by employees. 

Employees then purchase healthcare related products and services and provide proof of purchase to the employer or the chosen administrator.  This claim for benefits is reviewed for completeness and accuracy and finally, reimbursement is issued to the employee for the appropriate dollar amount. 

The IRS requires any medical expenses not included in gross income be verified expenses.  Many employer groups find that this substantiation of medical expenses is most effective when performed by a third party administrator, or TPA.  

Technology is advancing to reduce friction in this process by supplying information directly from providers and insurers to the TPA, where in the past the employee would have to mail copies of receipts to the TPA.  Coupled with the prevalence of debit cards, the amount of administrative work required on the part of the end user has decreased considerably over the years.  As well, the overall timeline to issue benefits has decreased and reimbursements can occur consistently within 48 hours, often in real-time.

8 benefits of merps

8 Top Benefits of MERPs Over Traditional Health Insurance

How can an employer benefit from adding a MERP to their benefits offering?  An overview of many specific advantages of this approach follows.

1. Control of Funds.  At year end, any unspent funds stay with the employer and are available for next year’s benefits programs.  This is in contrast to a traditional insurance plan where premium dollars by and large are retained by the insurance carrier.  This is because the MERP creates an allocation of funds that may be spent toward eligible expenses only if they are incurred, rather than an obligation to pay.  So, for the same cost, employers can provide benefits that will be fairly accessed only by those who need them.  

2. Flexibility.  Smaller employer groups are often constrained by a set menu of plan design offerings from a selected carrier.  By integrating a MERP, employers of all sizes can design their own plan offerings and easily make changes from year to year.

3. Wellness Incentives.  This flexibility also makes it easy to implement incentive-based plan designs to promote employer wellness objectives.

4. Rate Stability.  Here is a cool mnemonic:  Much Easier Renewal Process.  More than just a first year solution, pairing a MERP with a less expensive insured medical plan option lowers renewal costs, too. This is the case even when our model includes no change to medical trend assumptions

5. Partial Self-Insurance.  MERPs are commonly promoted as a way for a group to try out self-funding part of their medical benefit while limiting risk. 

6. Data, Data and More Data.  KBI Benefits refers to this advantage of a MERP as an “employee healthcare usage gage” in a post on their company’s blog.  This is a great description, particularly with many groups currently not able to view their own claims experience due to their size or pooling arrangement.  With portions of copay, for example, being run through the MERP administrator as well as the insurer, the employer will suddenly have full access to detailed utilization data specific to their employee population.  

7. A Bite-Sized Portion of Consumerism.  This approach introduces a behavioral element to an employer’s plan design with no financial impact to the plan participant.  More on this later.    

8. Defined Contribution.  Remember the massive shift from pensions to 401k plans during the 80s and 90s?  We are just now seeing similar movement within group medical benefit offerings.  Business needs are pushing more and more employers to seek ways to fulfill their desire to care for employees’ physical wellbeing without exposing themselves to unlimited risk.  Using a MERP in conjunction with an insured medical plan allows employers to easily compose a fixed contribution strategy even over multiple years.

Is There a Difference Between a MERP vs. an HRA?

In many ways, a MERP looks and acts similarly to a traditional HRA.  

In addition to the items discussed above, both programs are tax-advantaged.  So long as the employer takes appropriate care to maintain plan compliance, funds placed in a MERP are tax-deductible to the employer and distributions are tax-exempt to employees.  This is because the IRS excludes “any medical care reimbursement made to or for the benefit of an employee under a self-insured medical reimbursement plan (within the meaning of section 105(h)(6) )” from the definition of wages.

However, there are a few key differences.  Unlike a traditional HRA, employee contribution is permissible with a MERP plan.  This allows employers to cost-share the administrative expense with employees in addition to claims cost and cost of insurance.  The ability to set premium equivalent rates is a huge aid to an employer considering this type of program as an alternative to traditional insurance.  

Some administrators can even assist with accurate data-based cost projections and the formulation of premium equivalent rates at plan inception and each subsequent renewal.  And, although both are notional benefits programs, meaning that money is earmarked but not spent until claims are actually incurred, the MERP is the only option that does not require any physical account. 

MERPs also tend to offer more freedom in a few key ways.  First, many HRAs are linked directly to the medical insurer as a part of the service offering.  In contrast, placing a MERP with an outside administrator makes it easier to market underlying health insurance plans at renewal to keep rate increases in check with minimal visibility to employees.  With a MERP, an employer also can create several different plan options atop a single carrier plan, offering greater flexibility over traditional HRAs which pair on a 1:1 basis.

What Types of MERPs are There?

In the example above, we described the simplest type of MERP:  a Stand-Alone MERP.  Benefit levels are set and funded without contemplating any underlying health insurance plan.  In cases where an employer intends for the MERP to cover premiums for individual coverage for all or a class of employees, we can call this an Individual Coverage MERP.

In contracts, a medical reimbursement program designed to pair with an employer-provided insurance plan is referred to as a Group Coverage MERP.  Within this category, a common example is purchasing a HDHP renewal option which raises the deductible considerably while layering in a MERP to minimize the impact of this change to the employee.  This is often called a Deductible MERP.

MERPS can also be established as Dental/Vision Only.  Pricing advantages over insured group plans are even stronger with dental and vision benefits, and there is a growing appetite in the market to forego expensive insured products and instead offer reimbursement plans to fund these services. Groups who may not have been able to afford coverage in the past as well as groups with favorable loss ratios who would like more of their benefit dollars to wind up in the hands of their employees may find these alternative funding mechanisms attractive.  

How to Explain a MERP Program to Employees

Conceptually we can all agree that consumerism is a must in order to change participant behaviors in ways that will benefit health plan cost trends and ultimately employer spend on benefit packages. 

However, the reality of implementing such features in a market where employers compete to attract and retain top talent is that they often choose, for good reason, not to take the risk of any change that might dissatisfy. 

Year after year, benefits consultants publish compelling arguments as HR departments watch the insurance industry stagnate.  Enter the MERP:  Using this strategy an employer can raise employee awareness of costs in the form of separately-funded reimbursements with no financial impact.  This behavioral change for users of the plan is a micro-step toward consumerism allowing gradual change.

As a member of the sales team at The Difference Card, I can personally attest that the #1 concern cited by employer groups evaluating a MERP-based renewal strategy is the impact to their employees.  In our experience, employees who understand that the new card in their hands permits their employer to offer the same benefit levels, carrier, and network at significantly lower rates can accept and even highly value the solution.  With traditional health insurance, employee familiarity requires less hand-holding.

When setting up a MERP for the first time, communication is key to a successful rollout.  Employees need a clear and concise explanation of which portions of benefits will be funded by the MERP and which will continue to be paid by the insurer and when to contact the plan administrator versus the insurer for service.  Typically a debit card will be provided, if not employees should understand how they will receive reimbursements from the MERP.  

Ongoing, employees will need to be able to access full instructions with particular emphasis during future enrollment periods while making their plan selections.  Here again, technology is making this aspect of plan administration far easier and much less costly.  While there is no substitute for an educational conversation, being able to supplement more and more with abundant self-service options only leads to greater success and satisfaction.  And, forgoing distribution of costly and non-modifiable printed materials in favor of online repositories with access to downloadable flyers, documents, video instructions, and recordings of past meetings amplifies savings to the plan.

Simplify Your Employer Benefits With The Difference Card

We’ve discussed all of the various ways within a Medical Expense Reimbursement Program that “employers and employees can benefit from the premium savings while employers still offer employees a high-quality benefits package.

An important first step in implementing this type of strategy is to decide who will administer the MERP.  The majority of groups will find that hiring a Third Party Administrator is both cost effective and offers better features than administering in-house.  

According to the International Risk Management Institute, the responsibilities of an outside administrator, or TPA, “typically include claims administration, loss control, risk management information systems, and risk management consulting.”  

At the Difference Card, our employees pride themselves on adept handling of all of these aspects of administering your plan.  Each client is assigned an account manager as well as a renewal specialist to assist with annual financials.  We will work with you to develop a communication plan and materials, and employees can call our participant call center for a detailed and knowledgeable response on any questions. 

Additionally, we can assist you in meeting your wellness objectives. The Kaiser Family Foundation reports that 77% of companies offering an incentive believe they are effective in increasing participation in health and wellness programs.   

Conveniently, it couldn’t be easier to set up an incentive using a MERP from the Difference Card.  We offer prepackaged suggestions based on what we have seen as most effective across our book of business.  Or, the system flexibility to custom tailor an incentive to your group’s specifications.  

And best of all, our wellness incentive program goes well beyond just offering our clients marketing literature.  As your administrator, we can easily assume responsibility for both verifying employee compliance with wellness incentive requirements, as well as enrolling employees in the appropriate plan options based on qualifications.


Author: Bethany Nelson, Senior Difference Card Consultant 

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