MERPs and the self employed

[Guest jackmo]

I would appreciate any input the forum might have on this subject.

Situation /Circumstances: 1) The employer is an LLC (with 3 owners)

2) The company has purchased a High Deductible Health Plan (HDHP)

3) They have implemented a MERP--a simple deductible reimbursement plan. After the employee pays the first 1,500 of deductible, the MERP will pay

up to the next 1,000 of deductible expenses to meet the carrier's 2,500 deductible.

4) The MERP is not funded. Claims are paid from the employer's general assets as needed.

LLC owners are specifically not allowed to participate in an HRA, per IRS Notice 2002-45. However, the authors of EBIA's HRA manual state that "we wonder whether one

could rely on Code Section 104(a)3 to argue that self-employed individuals should be able to participate in an HRA on an after-tax basis (i.e., the self-employed individual is

taxed on the value of the HRA coverage, perhaps using the COBRA premium without the 2% add-on as its value), since it seems to contemplate that result for a self-insured

plan." [Footnote referencing Code Section 104(a)3].

Questions: 1) If it could be argued that the self employed might be able to participate in an HRA (on an after tax basis, per above), how much stronger is the case for their participation in a MERP? Is it a "slamdunk", or is there the same ambiguity as for an HRA?

2) Would the MERP Plan document claim it's authority from Code Sections 104, 105, 106?

Many thanks for your help!

[J Simmons]

Questions: 1) If it could be argued that the self employed might be able to participate in an HRA (on an after tax basis, per above), how much stronger is the case for their participation in a MERP? Is it a "slamdunk", or is there the same ambiguity as for an HRA?

What is going to be the "premium" amount for the MERP coverage as "accident or health insurance" other than the $1,000 itself? For 3 LLC owners for a max of $1,000 each are you going to have an actuarial study to determine the value of the coverage?

If not tax-free and you use $1,000 itself as the value of the coverage, MERP or HRA inclusion simply amounts to the LLC paying each of the three owners to the extent that each one's medical expenses exceed $1,500 per year--the payout capped at $1,000/year each. It might be much easier for the LLC to exclude them from the MERP and paying them each $1,000 per year (if they each own 1/3 of the LLC, then it would be a wash whether paying that $1,000 each or the three of them having that much more as their share of the LLC's profits).

Comparing the MERP inclusion to just giving them the $1,000 boils down to the LLC having some purpose in limiting how much each of its three owners will receive of that $1,000 to by how much he/she has medical expenses for the year that exceed $1,500. Do the three owners collectively have a purpose in only allowing each of them so much of that $1,000 as his or her medical expenses for the year exceeds $1,500? If not, why include them in the MERP on an after-tax basis?

To your question # 1), slamdunk? No. I see it as the same "ambiguity" for the HRA and MERP.

2) Would the MERP Plan document claim it's authority from Code Sections 104, 105, 106?

Probably need all three--and EBIA too.

[Guest jackmo]

Thanks for your reply, J. Simmons.

Determining the premium, or value, seems to be a "catch 22". There is no claims history as a basis for an actuarial study. And on the other hand, I have been told that COBRA will not allow the use of the maximum exposure (1,000/2,000), divided by 12, to come up with a monthly value.

There is an additional complication due to the fact that 2 of the 3 LLC owners have family coverage. The carrier's coverage has a max of 2 deductibles per family. So the MERP has an exposure of 2,000 for family coverage. Meaning the owner with single coverage won't get as fair a deal if all are grossed up according to their level of coverage. This is something they're just going to have to hammer out among themselves.

It seems to me that it's just not worth all the hassle of trying to figure out a way they can participate due to 1) the relatively small amount of money involved, and 2) the risk of an unfavorable IRS audit on their personal and/or company returns.

But from a company standpoint (there are other employees) it made excellent sense to take the MERP/HDHP step since by doing so they managed to save $40,000.

Again, thanks so much for your input! Any further thoughts certainly appreciated.

[Guest taylorjeff]

IF they do decide to go the "gross up" route, and assuming the underlying plan is a qualified HDHP, the partners could each set up a health savings account so the taxable extra earnings are offset by the above the line HSA deduction. They also certainly could contribute the additional money up to the HSA max to shelter even more of their income. The LLC and partner would be subject to the combined FICA taxes up to the limit, then the medicare tax.

They could also look into setting up a fully insured MERP to have the funds paid via the LLC. I'm not familiar with the accounting rules for a LLC, but did have a fully insured MERP when I was both a sole proprietor and when I converted to a S-Corp. I discontinued the MERP when I went to a HSA compatible plan.

[J Simmons]

... a fully insured MERP to have the funds paid via the LLC....

Please explain in greater detail.

[Guest taylorjeff]

Sure. If you have some specific questions, I'll be glad to answer to the best of my ability and knowledge. If you wan to find out more about fully insured medical reimbursement plans, there are various companies who sell them and they have copius information online about their plans as well as contact info. My plan was through Assurity Life (Benecomp/SML Select). Also, Lincoln Financial Group and First Rehab Life provide similar plans.

There are advantages and disadvantages to these plans, and these vary depending on the needs of the particular client.

... a fully insured MERP to have the funds paid via the LLC....

Please explain in greater detail.