• Full Tax Deduction And Employee Exclusion
  •  Reimbursements reduce the employer’s taxable income while sparing employees federal income and payroll tax.
    
    
• Broad Expense Coverage
  •  Any expense that qualifies under IRC § 213(d) can be covered, giving the business far more flexibility than a cafeteria plan or HSA.

 

• Flexible Plan Design
  •  Annual caps, waiting periods, and employee classes can be tailored to meet YOUR goals...so long as the plan passes nondiscrimination testing under § 105(h).
    
    
• Talent Attraction And Retention
  •  A MERP can offset rising deductibles or even stand in for group coverage in very small firms, making the benefits package more competitive.

• Health, dental, and vision insurance premiums
• Deductibles, copayments, and coinsurance
• Prescription drugs and insulin
• Dental treatment, orthodontia, and dentures
• Eye exams, glasses, contacts, and LASIK surgery
• Chiropractic care and physical therapy
• Psychological counseling and psychiatric services
• Durable medical equipment such as hearing aids, wheelchairs, CPAP machines
• Long-term-care services and limited premiums 

C Corporations

Shareholder-employees (no matter how much stock they own)...are treated like any other employee. Reimbursements are excluded from wages so long as the corporation adopts a written plan, integrates the MERP with a compliant group health plan (or limits the MERP to excepted benefits), and substantiates every claim.

S Corporations

Unfortunately, they don't work well here for owners (but see the Anomaly Strategy below).
>2% Shareholders include MERP reimbursements in Form W-2 wages. 

Partnerships And Multi-Member LLCs

Partners are self-employed, not employees, so reimbursements are treated as guaranteed payments subject to income tax and self-employment tax. 
A partner’s spouse who works in the business as a bona fide W-2 employee can be covered; the family then receives tax-free benefits through the spouse.

Sole Proprietors And Single-Member LLCs (Disregarded)

The owner cannot receive tax-free benefits directly. However, if the proprietor’s spouse is hired as a bona fide employee, the spouse may be covered under the MERP and the entire family’s expenses can be reimbursed tax-free.  This is a GREAT strategy for real estate investors with a management co!

1. Form a single-member LLC that is wholly owned by the shareholder’s spouse.
2. The LLC performs real management or administrative services for the S-corp and invoices a commercially reasonable fee.
3. The spouse becomes a W-2 employee of the LLC.
4. The LLC adopts its own MERP covering the spouse and the spouse’s family—including the S-corp shareholder.
5. MERP reimbursements are deducted on Schedule C, excluded from the spouse’s wages, and effectively convert the shareholder’s medical costs into deductible business expenses.

• Group Health Plan Integration
  • A stand-alone MERP that reimburses broad medical expenses violates the ACA market-reform rules and triggers a steep excise tax. To comply, either integrate the MERP with an ACA-compliant group plan or limit reimbursements to excepted benefits such as dental and vision (or keep annual reimbursements under $500 per employee).
    
    
• Qualified Small-Employer HRA (QSEHRA) Or Individual-Coverage HRA (ICHRA)
  • If the employer already offers one of these arrangements, a MERP is usually redundant unless it is limited to excepted benefits.
    
    
• High-Deductible Health Plan And HSAs
  • Reimbursing first-dollar medical costs before the HDHP deductible disqualifies employees from making HSA contributions. If needed, at Anomaly we have worked with clients to have unqiue HSA eligibility by drafting the MERP as a post-deductible or limited-purpose (dental and vision only) plan.
    
    
• Individual Insurance Premiums
  • Reimbursing marketplace or other individual premiums outside a QSEHRA or ICHRA framework remains non-compliant and exposes the employer to ACA penalties.