One of the most frequently cited benefits for employment is health care. Small businesses especially suffer from the high costs of offering insurance benefits, and in the end, may even lose valuable employees due to the inability to offer better insurance than what they can afford.
Using a Medical Expense Reimbursement Plan, or MERP allows you a way to provide assistance for uninsured medical costs without putting too much at risk for your small business. In this blog, we’re going to talk about what a MERP can do for you and how to go about getting one established.
What is a MERP?
A MERP is a plan put in place to reimburse employees, their spouses, and their dependents for costs incurred during medical treatment. You can even use it for yourself if you can be considered an employee!
These reimbursements can be attributed toward health plan deductibles, copayments, coinsurance, or other qualified medical expenses. Employers have more flexibility with a MERP than other forms of health care coverage, free to design the plan as they wish while still benefiting both the employee and their own business.
How to Use a MERP
To use a MERP, you’ll first need to fill out a plan document and summarize the plan description. This will create a MERP that can then be used for employees.
While you can’t use your MERP to favor your more highly compensated employees, you can utilize a classification test (such as, “all participants in Employer’s group health care plan”) to qualify those that can benefit from the MERP.
Exclusions can also apply, such as those under age 25, anyone working less than 35 hours a week on a regular basis, anyone who works less than nine months out of the year, and anyone who has worked less than three years with your company.
Please note that you can’t use a MERP for costs incurred before the plan’s effective date.
When tax time comes around, file Form 720 by July 31 of the year following the plan year. You will also need to pay the “Patient-Centered Outcomes Research” fee, which changes annually.
Can I Use My Company’s MERP?
The standards for using a MERP for yourself are according to your business classification.
Proprietorship, Partnership, LLC, or “S” Corporation: You are not eligible for the MERP, as you are classified as “self-employed”. However, with an S corporation, you can segregate part of your income through a proprietorship or C corporation and pay benefits through that way. You can’t use your spouse as an alternative to the C corporation, however – S corporations count both yourself and your spouse as self-employed.
C Corporations are a little different. If you’re single, you can pay benefits to yourself as you would an employee. If you’re married, hire your spouse and pay the benefits through him/her.
Benefits of a Medical Expense Reimbursement Plan
MERPs are great for saving your company some money. Tax deductions not only include 100% of your employees’ health insurance but out-of-pocket medical costs as well. This covers costs like premiums for major medical and supplemental, Medicare and supplemental, and qualified long-term care.
Other costs covered include routine expenses like co-pays, deductibles, and prescriptions, as well as vision and dental care, orthodontics, fertility treatments, schools for learning-disabled children, and even OTC medicines and health care supplies prescribed by a physician. Reimbursements can be made to the employees or straight to the health care providers.
Typical itemized deductions on your taxes are rated at only 7.5%, but using a MERP allows you to deduct 100% of your out-of-pocket costs. You won’t even be required to pay self-employment tax that is usually paid on plan benefit deductions.
In short, a MERP will do wonders for not only your company but for you and your employees. If health care costs seem to be eating through your business finances, consider establishing a MERP.
