A MERP is a Medical Expense Reimbursement Plan. The business agrees to reimburse employees for certain medical costs directly, rather than paying an insurer to carry all of that risk.

Why it belongs in a tax conversation

A dollar routed through payroll gets taxed on the way past: the business pays payroll tax on it, and the employee pays income tax on what is left. Reimbursements made under a properly documented medical reimbursement plan work differently — they are generally deductible to the business and generally excluded from the employee's income. The same dollar simply goes further.

That is the part most owners have never had explained. It is not a cheaper insurance quote. It is a change in how the money is characterised.

Where the saving actually comes from

What has to be true

• A written plan document, properly adopted before reimbursements begin
• Nondiscrimination rules satisfied — it cannot be arranged to favour owners or highly compensated employees
• Integration with a compliant group health plan, or one of the arrangements the law separately permits
• Expenses substantiated before they are reimbursed, and administered consistently

None of that is exotic. All of it is the difference between a structure that holds and one that does not.

What it is not

It is not a benefit cut. Employees keep the coverage level they had — what changes is who carries the layer between the old deductible and the new one. It is also not a do-it-yourself exercise: the plan needs proper documents, administration and review by your own benefits counsel and tax advisor before anything moves.