With healthcare costs continuing to climb, many employers are looking for ways to save. In 2025, the average cost of employer-sponsored healthcare coverage in the United States is expected to increase by 9%, an anticipated cost of more than $16,000 per employee. MERPs offer small and mid-sized businesses a more affordable solution to traditional health insurance, but it has drawbacks.
Let’s compare a MERP with traditional health insurance to determine which is right for your business.
What Is MERP?
A MERP is a Medical Expense Reimbursement Plan that allows employers to reimburse employees tax-free for individual health insurance premiums and other out-of-pocket medical expenses they may incur.
What makes MERPs particularly appealing to businesses is that they are customizable and can be personalized to the specific needs of both employers and employees. Using a MERP allows businesses to manage their healthcare budgets more effectively while retaining many health benefits workers need to maintain health and wellness.
MERP Functionality
Under a MERP, employees are not responsible for paying income tax on reimbursements as reimbursements are not subject to payroll tax. In addition, plan costs and reimbursements are deductible to the employer.
Employers begin by setting a reimbursement allowance, which determines the reimbursement allowance per employee. MERPs can be structured in a variety of different ways. In some cases, workers must pay their own healthcare costs and submit medical receipts to the employer, who reimburses them up to the designated reimbursement allowance.
In other cases, employers will fund a debit card with funds for the member to use to pay for services when they go to a medical provider. Some MERPs will be set up similar to a secondary health plan in which the medical provider files a claim with the MERP so the MERP gets reimbursed directly by the medical provider, so the employee doesn’t have to pay up front.
Benefits of MERPs
MERPs provide businesses with a structured system for handling employee medical expenses while reducing administrative errors for more effective processing and auditing. In addition to providing more flexible coverage, MERPs offer significant tax advantages, resulting in potential cost savings. MERPS can also increase employee satisfaction by providing accurate and timely reimbursements.
Comparing MERP and Traditional Health Insurance
Employers have several options in terms of health insurance, with traditional health insurance and MERPs being the most common options. By looking at the differences and similarities, you can get the insight to decide which is best for your company.
Cost Considerations
MERPs offer several financial advantages to employers, starting with tax advantages. As MERPs are generally funded with pre-tax dollars, they allow employers to reduce their taxable income. MERPs are also associated with fewer administrative burdens as employers can often streamline processes and reduce costs related to managing complex health insurance plans.
Flexibility and Customization
MERPs offer greater flexibility and customization than traditional health insurance plans, especially when personalizing benefits to meet employees’ needs. They operate within group health insurance to provide coverage for approved out-of-pocket healthcare expenses.
Employers set an annual reimbursement limit for employees, representing how much the employee will reimburse workers for qualified healthcare expenses. Employers can design plans that cover 100% of their employees’ medical expenses. Traditional health insurance, on the other hand, comes with predefined benefits and coverage options that tend to be less customizable.
Administrative Complexity
While MERPs generally have the upper hand in cost and flexibility, their administrative complexity is often greater than traditional health insurance. MERPs tend to require a more hands-on approach as HR departments may have more involvement in the claims process such as the submission, verification, and reimbursement of employee expenses.
Employers are also tasked with defining eligible expenses, setting reimbursement limits, and checking that documentation complies with IRS guidelines.
Sustainability for Different Types of Businesses
When determining the sustainability of MERPs versus traditional health insurance, it’s important to consider factors such as cost control, flexibility, and long-term viability, all of which can vary based on the type and size of the business.
Small to Mid-Sized Businesses
MERPs can be a sustainable choice for small and mid-sized businesses as they are flexible and offer cost-control advantages. Smaller companies often encounter budget constraints and may not need the broad coverage of traditional health insurance.
A MERP allows these businesses to customize benefits to specific employee needs and achieve more predictable reimbursements by only reimbursing employees up to the set limits.
Large Enterprises
Larger enterprises can also effectively manage MERPs as they have the capacity to handle compliance requirements and greater administrative complexity. These businesses can use MERPs to control costs while providing employees custom benefits that address employee needs.
However, traditional health insurance remains a sustainable choice for large enterprises due to economies of scale, resulting in reduced per-employee costs. Traditional health plans also offer extensive administrative support from insurance providers, which can help ease management-related burdens.
Determine If a MERP is Right for You With Consulting from New City
With the cost of healthcare skyrocketing and no end in sight, many employers are looking to reduce their healthcare spending without sacrificing employee benefits. At New City Insurance, we work with businesses of all sizes to build custom plans that focus on long-term cost savings while providing the same or better coverage for your employees. Contact New City today at 888.210.2765 to see how we can help you save.