Savvy Health Plus Tax Efficient Strategies

As healthcare costs continue to rise, employers seek innovative solutions to manage expenses while providing robust benefits. Medical Expense Reimbursement Plans (MERPs) under Section 105(c)(h) of the Internal Revenue Code offer a tax-advantaged approach to reimburse employees for out-of-pocket medical expenses. Effective as of June 14, 2025, this white paper explores how MERPs enhance health insurance plans, delivering cost control and tax savings for businesses and employees alike.

1. Tax-Free Reimbursements
MERPs allow employers to reimburse employees for qualified medical expenses— such as deductibles, copays, and premiums—on a tax-free basis. Under Section 105(c), these reimbursements are excluded from employees’ taxable income, while employers deduct them as a business expense under Section 105(h), potentially saving up to 50% on payroll taxes (e.g., FICA, Medicare).

2. Cost Control and Flexibility
MERPs enable employers to set annual reimbursement limits, providing predictable budgeting and avoiding premium hikes. Unlike traditional plans, MERPs can be paired with high-deductible health plans (HDHPs) or offered standalone, allowing customization to fit diverse employee needs and reduce overall insurance costs by up to 18%.

3. Enhanced Employee Benefits
By covering expenses not fully addressed by standard insurance—such as vision, dental, or preventive care— MERPs improve employee satisfaction and retention. Employers can tailor reimbursements to specific classes (e.g., full-time vs. parttime), ensuring equitable benefits.

4. Compliance and Administration
MERPs require a written plan and proper documentation to comply with IRS rules, ensuring tax advantages. Outsourcing to third-party administrators simplifies claims processing, reducing administrative burdens while maintaining eligibility for tax benefits.

5. Scalability for Small Businesses
Small businesses, including self-employed individuals with a spouse as an employee, benefit significantly from MERPs. This structure allows 100% deduction of family health costs, leveling the playing field with larger firms.

Challenges and Considerations
MERPs demand careful setup and adherence to nondiscrimination rules to avoid tax penalties. Consulting tax professionals ensures compliance and maximizes benefits, especially for businesses with varied employee classes.

Conclusion
MERPs under Section 105(c)(h) provide a strategic tool for integrating tax efficiency into health insurance plans. By offering tax-free reimbursements, cost control, and enhanced benefits, MERPs support both financial health and employee well-being.