Medical Reimbursement Plans (MRPs) offered under Section 105 of the IRS Code can be considered an overlooked executive benefit program. These plans, when implemented properly, repay insured employees for many out-of-pocket medical expenses not covered by their health plan.

A caveat and explanation: Section 105 Plans can take many forms. Used as a Health Reimbursement Arrangement that is funded solely by employer contributions, they can reimburse employees for medical expenses, and provide reimbursement up to a maximum amount, with any unused portion being carried over to the following year. As such, employers have a new option that allows them to involve employees in the healthcare buying process. Employers may keep the money, however, if an employee leaves. Employer-funded plans cannot be discriminatory and must benefit 70% of your employees, as a rule. For information on what an employer-funded HRA or Consumer Driven Health Plan can do for you and your business, click here.

(While regulated under the same Section 105 of the IRS Code, Health Savings Accounts are different from Health Reimbursement Arrangements and should not be confused.)

In contrast to HRAs, Medical Reimbursement Plans (MRP's) that are intended to favor highly compensated / key employees, or be selective, MUST be fully-insured. Insured MRP's are not subject to federal non-discrimination rules.

MRP's are meant to supplement any health insurance plan - either self funded, or fully-insured - and provide a method to make out-of-pocket employee costs deductible to the employer. If the business owner is also an employee, subject to test, this type of benefit program allows him to deduct ordinary medical expenses, not covered by the basic health plan, without being subject to the 7.5% of adjusted gross income provision of a typical 1040 with itemized deductions. MRPs provide coverage for a specific group of plan members, such as managers, or executives, owners, etc., providing they can be defined on an earnings or job title basis. Minimum perticipation can be as few as one employee. In order for the cost to be deductible to the employer and tax-free to the employee, the benefits must be "insured". Because the plan is insured, it can be offered to as few or as many employees as the employer wishes to include. In reality, this means that this benefit plan can, as indicated, discriminate and favor key employees.

The advantages are obvious: for the employer: greater flexibility in the design of their plan, including establishing benefit maximums and amounts of reimbursement, eligibility requirements, participation, etc. For employees, the plan's reimbursement payments are not considered to be taxable income to the employees, provided that they have not taken a medical expenses deduction for these amounts on their personal tax return. When coupled with a Section 125 Flex plan, the savings can be significant.

Typically, there have been few insurers offering MRPs until recently; now there are several insurers in the market. Generally, these plans will cover the out-of-pocket expenses not covered by the group medical, dental, and vision plans. Since many of these plans are designed for highly compensated employees, most include a life insurance policy as well. Most include stop-loss protection, as well.

An uninsured (self-funded) MRP cannot be discriminatory and are subject to the nondiscrimination regulations contained in IRS Code Section 105. An uninsured plan discriminates as to eligibility unless it benefits:

1. 70% or more of all employees, or

2. 80% or more of all employees eligible to benefit under the plan, if 70% or more of all employees are eligible to benefit under the plan, or

3. A group of employees described in IRC Section 410(b)(2)(A)(I) that is found to be a non-discriminatory classification in accordance with Prop. Treas. Reg. 1.410(b)- For these purposes, there may be excluded from consideration any employees who have not completed three years of service, part-time employees whose customary weekly employment is less than 35 hours, employees covered by a collective bargaining agreement, and nonresident aliens.

A medical reimbursement plan will not discriminate as to benefits if the type and amount of benefits available to highly compensated participants and their dependents are also available on the same basis for all other participants and their dependents. This test is applied by looking at available benefits rather than actual benefit payments under the plan.

If the plan is discriminatory, then all or part of the medical benefits paid for the benefit of a highly compensated employee will be taxable to that employee.

(A highly compensated employee meets one of three tests: Is one of the five highest paid officers of the employer, or is a shareholder who owns directly or indirectly more than 10% in value of the employer's stock, or is in the top 25% of the highest paid employees.)

Obviously, before establishing a MRP, you should consult with an appropriate tax advisor to review your needs and determine whether an MRP is appropriate for your particular circumstances. In addition, a competent Third Party Administrator should be used to set up, maintain, and compliance-test this program!

*IRS Code regulations, as well as the Employee Benefits Security Administration site at http://www.dol.gov/ebsa/ should be reviewed prior to plan implementation.

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