Alternative Self-Funded Plans - Health Reimbursement Arrangements (HRAs) and Medical Expense Reimbursement Plans (MERPS)

Health Reimbursement Arrangements (HRAs) were created by Revenue Ruling 2002-41 issued by the Internal Revenue Service (IRS) on June 26, 2002. Since their inception, they have been gaining in popularity, evidenced by the high demand for Significa Benefit Services’ administrative expertise with HRAs.

Under an HRA, a predetermined amount of funds are held in individual accounts by the employer for future reimbursements of IRS-approved medical expenses, not covered elsewhere, which are incurred by employees, their spouses and dependents.

The employer must fund the HRA; no employee contributions are allowed. In addition, the employer can, but is not required to, design the plan so that participants who do not spend all the money allocated to their accounts for the year can roll over the money to the next and subsequent years.

An HRA can be designed to cover any IRS-eligible medical care expenses that are not covered by insurance. It is also permissible to design the plan so that reimbursements are limited to specific expenses.

Our experience indicates that the “limited” HRA plan design seems to be the most popular. Employers contract with insurance companies to provide employees with health coverage with higher deductibles and lower premiums. The premium savings are used to fund the HRA, and reimbursements are limited to all or a portion of the higher deductibles.

A Medical Expense Reimbursement Plan (MERP) provides reimbursement to employees and their dependents for IRS-approved medical care expenses which are not limited or excluded by the plan document. Like a Health Reimbursement Arrangement (HRA), it is employer-funded and typically used to painlessly transition employees to higher deductible, lower cost group health insurance by the employer reimbursing all or a portion of the higher deductible. Unlike an HRA, funds unused by employees and dependents at the end of the year cannot be rolled over to subsequent years.