Is A Stand-Alone MERP or HSA Subject to ObamaCare? An Over Looked Loophole?

Federal Register June 28, 2010 at page 37190-37191lth plan.

. PHS Act Section 2711, Lifetime and Annual Limits (26 CFR 54.9815-

2711T, 29 CFR 2590.715-2711, 45 CFR 147.126)


    Section 2711 of the PHS Act, as added by the Affordable Care Act,

and these interim final regulations generally prohibit group health

plans and health insurance issuers offering group or individual health

insurance coverage from imposing lifetime or annual limits on the

dollar value of health benefits.

    The restriction on annual limits applies differently to certain

account-based plans, especially where other rules apply to limit the

benefits available. For example, under section 9005 of the Affordable

Care Act, salary reduction contributions for health flexible spending

arrangements (health FSAs) are specifically limited to $2,500 (indexed

for inflation) per year, beginning with taxable years in 2013. These

interim final regulations provide that the PHS Act section 2711 annual

limit rules do not apply to health FSAs. The restrictions on annual

limits also do not apply to Medical Savings Accounts (MSAs) under

section 220 of the Code and Health Savings Accounts (HSAs) under

section 223 of the Code. Both MSAs and HSAs generally are not treated

as group health plans because the amounts available under the plans are

available for both medical and non-medical expenses.\7\ Moreover,

annual contributions to MSAs and HSAs are subject to specific statutory

provisions that require that the contributions be limited.


A Medical Expense Reimbursement Plan (MERP) is an employer provided medical care expense reimbursement plan for employees, their spouses and dependents. The MERP is intended to allow employees to meet most medical care expenses through the MERP reimbursements. It is often used where there is no insurance coverage in place. This plan is particularly attractive for small businesses or family-owned businesses but is not available to self-employed individuals. The MERP also may be called a Health Reimbursement Arrangement (HRA), and regardless of the name of the particular MERP, each will share certain characteristics described below.

First, as is the case with the health FSA, the employee whose medical expenses are reimbursed through a MERP receives favorable tax treatment in that the reimbursements for qualified expenses are not included in the employee’s gross income. Only income tax deductible medical expenses may be reimbursed by the plan, making the reach of the MERP somewhat different than the range of expenses that may be reimbursed with a health FSA. Cash benefits other than reimbursements for substantiated qualified expenses are not allowed. The MERP must be in existence prior to the time an employee incurs medical expenses that are to be reimbursed under the plan. Pre-existing medical expenses do not qualify for reimbursement under these plans.

Second, the terms of the operation and coverage provided through the MERP must not discriminate in favor of shareholders or highly compensated employees and must be available to all employees. The favorable tax treatment is available only where the non-discrimination requirements of Title 26 US Code Section 105(h), are met. The MERP benefits should not be offered to persons other than current or former employees, their spouses and dependents and care should be taken to establish the employment status of those being offered coverage.

The MERP is funded solely by the employer and does not depend on or accept employee contributions or salary reductions in lieu of contributions. There is no limit on the contributions to the plan or the amounts held within the plan other than those set by the plan document. Unlike the health FSA, the MERP may allow the employee to carry forward those funds that are not expended in one period of coverage to be used for medical care expenses in a subsequent period. See Revenue Ruling 2002-41. The coverage period need not be one year, as is the case with the health FSA, but may be for a period as defined by the plan. The MERP does not require a trustee or custodian for its operation, though a sponsor, such as the employer, is necessary.

Editor’s Note: Avoiding punishing ObamaCare requirements and still offer employees an employer sponsored health plan may be possible through a MERP. We think so.