Q:   I own a small business with fewer than 10 employees, and I don’t offer health insurance because the cost is prohibitive.  However, I would like to offer employees financial help -without increasing their salary–so they can buy their own insurance.  What is the best way to do this? 

A:   Great question, and one that many other small business owners will relate to. It’s well known that offering health insurance benefits gives employers a competitive edge and helps to attract and retain talent.  Unfortunately, insurance rates have sky-rocketed and are practically unaffordable for small business.  But there may be a way for you to help pay for your employee’s private insurance, where your contributions are both deductible for your business and excluded from the employees’ gross income.

Try asking your accountant or tax attorney about a provision of the *IRS code referred to as a Medical Expense Reimbursement Plan or MERP.

MERPs are employer-funded plans.  They’re highly flexible to suit a company’s needs, so it can be a very simple plan or rather complex offering various combinations of traditional benefits.  But because employers have complete control over what is covered, in your case you could keep it simple and use it only to reimburse private health insurance premiums.

Say you want to contribute no more than $2,400 yearly per employee ($200/mo). You can set up this maximum when you design the plan.    Employees then shop for their own insurance and submit the premium costs for reimbursement.

Advantages

• Employers benefit because they can deduct their costs, and offer an affordable attractive benefit with a fixed cost.
• Employees benefit because they get some of their health insurance costs paid for with tax-free money.

MERPs do require a written plan document, a summary plan description and other such creatures of the red-tape world.  So to implement one, you will need expert advice from an accountant, a benefits professional, or third-party service. Setup costs and administration are reasonably affordable.  Research it carefully, weigh the advantages vs. the hassle, then decide.

Disclaimer: this column is not intended as legal or tax advice.  *Section 105 www.irs.gov/publications/p969/ar02.html click Health Reimbursement Arrangements (HRA)

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