What SIMERP is

A note on the name. The IRS’s own wording omits the E. Treasury Regulation §1.105-11 and IRS Publication 15 use the phrase “self-insured medical reimbursement plan,” sometimes abbreviated SIMRP. Both abbreviations describe the same type of plan.

What it is, and what it is not

The third point in the right-hand column is the one that matters most legally. The IRS has warned against arrangements that pay employees regardless of whether care happened. A properly designed reimbursement plan is a different instrument, and the Legal & Compliance section explains where Treasury Regulation §1.105-2 draws the line.

Why employers evaluate the structure

Employers look at a SIMERP for four reasons:

• Payroll tax. Lower taxable wages mean the employer pays less in FICA tax on those dollars, every payroll after launch.
• Employee take-home pay. Employees pay less federal, state, Social Security and Medicare tax. Part of that saving funds their healthcare membership; the rest stays in their paycheck.
• Access to care. The plan is paired with medical care that employees can use, which is what the plan reimburses.
• No change to what exists. The group health plan, broker, payroll provider and gross pay stay as they are.

Each of these depends on wages, enrollment and plan design. How It Works shows the arithmetic and its limits.

Why the structure is less familiar

A SIMERP sits where tax law, employee-benefits law and healthcare regulation meet. Tax advisors typically focus on compliance and deductions, and benefits brokers on insurance premiums, so a plan that is neither can fall between the two. The underlying provisions are not new: Sections 105, 106 and 213(d) date from the Internal Revenue Code of 1954, and Section 125 from 1978.

How it works, in brief

1. Gross pay stays the same

   Nothing is cut and nothing is added to the paycheck.

2. Employees elect pre-tax

   The election runs under Section 125, the same section behind health FSAs.

3. Employee taxes fall

   Part of the saving funds the healthcare membership; the rest raises take-home pay.

4. Employer FICA falls

   Lower taxable wages mean a lower employer FICA match.

The full mechanism, with the arithmetic

Employer and employee considerations

What changes, and what doesn’t

The statutory basis, in brief

The structure rests on five sections of the Internal Revenue Code (105, 106, 125, 213(d) and 3121) and Treasury Regulation §1.105-2. IRS Publication 15 states that medical care reimbursements under an employer’s self-insured medical reimbursement plan are not wages for Social Security, Medicare and FUTA purposes.Review L12

The full statutory reference table

Where to go next

The plan structure

A SIMERP has two parts that work together:

• A Section 125 cafeteria plan, through which employees make the pre-tax election. An employer that already has a Section 125 plan for other benefits needs it amended to include the SIMERP.
• A self-insured medical reimbursement plan under Section 105, which reimburses medical care as defined in Section 213(d). Those reimbursements are excluded from income and wages under Sections 105 and 106. Treasury Regulation §1.105-11 requires the plan to be in writing.

The election, step by step

1. Gross pay stays the same

   Nothing is cut and nothing is added. The same paycheck is taxed differently.

2. Employees elect pre-tax

   Under Section 125, the election lowers the wages taxes are calculated on.

3. Employee taxes fall

   Federal, state, Social Security and Medicare tax drop. Part funds the healthcare membership.

4. Employer FICA falls

   The business stops paying its FICA match on those dollars, every payroll.

Under the cafeteria-plan rules, amounts an employee elects to reduce from salary are treated as employer contributions. The proposed cafeteria-plan regulations (Prop. Treas. Reg. §1.125-1, 2007) set this out; they are proposed, not final.Review L11

The reimbursement framework

Reimbursements must be tied to actual medical care and never paid whether or not care happens. That is the rule in Treasury Regulation §1.105-2. A plan designed around it has three features:

• Real medical care. Licensed clinicians deliver care that falls within the Section 213(d) definition.
• Documentation. Each interaction is recorded with standard procedure and diagnosis codes (CPT and ICD), creating a record that care occurred.
• A defined value. Where the reimbursement amount is set in advance, an independent actuarial valuation supports the value of the care.Review L4

An actuarial valuation sets the value of the care. It does not, on its own, establish that a payment qualifies for exclusion from income. That depends on the plan’s design and on substantiation, covered under Legal & Compliance.

Employer payroll-tax effect

IRS Publication 15 states that medical care reimbursements under an employer’s self-insured medical reimbursement plan are not wages and are not subject to Social Security, Medicare and FUTA taxes. IRC §3121(a)(2) is the wage exclusion behind that rule.Review L12

Because the election lowers taxable wages, the employer’s matching FICA tax falls on the elected amount. For the Social Security portion, this applies only to wages below the annual Social Security wage base.

Employee financial effect

Gross pay does not change and the employee’s group health plan stays where it is. What changes is taxable wages, so less tax comes out of the paycheck. Part of that saving pays the healthcare membership fee; the remainder is additional take-home pay.

Healthcare services and access

The plan reimburses medical care, so the care itself is central to the design. In EHP’s program, care is delivered by EHP’s healthcare partner, Revive Health, and funded through the $149 monthly healthcare membership.

Typical services in this kind of program include primary and urgent care, mental-health support and pharmacy services. Each covered service must fall within the Section 213(d) definition of medical care, which IRS Publication 502 illustrates in detail.Review B4

Financial illustration

The figures below are modeled per enrolled employee. They are an illustration, not historical results or a guarantee.Review F1

Claims redirection and renewal considerations

A SIMERP can affect employer costs in three ways. Only the first is calculated anywhere on this site.

1. FICA savings. Begin with the first payroll after launch. This is the only effect the estimate tool covers.
2. Redirection of care. When employees use the plan’s care for routine and pharmacy needs, some small claims may no longer reach the group health plan.Review F9
3. Renewal effect. A better claims history may support lower renewal rates on the group plan over time.

How much the second and third effects matter depends on the group plan’s funding arrangement and on insurer underwriting.

Implementation and administration

• Plan documents. The written plan, adoption agreement, Summary Plan Description and claims procedures, plus HIPAA privacy notices. See plan documentation.
• Administration. A third-party administrator maintains compliance documentation and works with the employer’s payroll provider to set up the payroll codes for the election.
• Ongoing monitoring. The administrator tracks regulatory change and updates the plan as needed.

Important assumptions and limitations

• All savings figures are modeled illustrations, not historical or guaranteed results.
• Figures are “up to” amounts per enrolled employee; actual results vary by state, salary mix and plan structure.
• A reimbursement is not unrestricted cash compensation; it must be tied to actual medical care.
• Claims-redirection and renewal effects are possibilities, not estimates.
• An exact figure for any employer requires an analysis of its actual payroll.
• Tax treatment of any specific plan should be confirmed by the employer’s own tax and legal advisors.

Framework overview

Two questions are easy to run together and should be kept apart.

1. Does the law permit this type of plan? The Internal Revenue Code provides for self-insured medical reimbursement plans, the exclusion of qualifying reimbursements, and pre-tax elections through cafeteria plans.
2. Do a particular plan’s payments qualify? That depends on the plan’s design and operation: whether reimbursements are tied to actual medical care, how they are substantiated, whether the plan documents are in place, and whether the plan meets the nondiscrimination rules.

The IRS warnings in this area are about the second question. Not every arrangement marketed under this name receives the same tax treatment.

How sources are labeled on this site

Every passage carries a label showing what it rests on, so the law itself is never confused with analysis or program details.

• Statute & regulationThe Internal Revenue Code and Treasury regulations, final or proposed.
• IRS guidanceIRS publications and Chief Counsel memoranda.
• EHP analysisEHP’s plain-language explanation of the sources.
• Financial illustrationModeled figures, with assumptions shown.
• EHP program informationDetails of EHP’s own program.

Statutory and regulatory reference

Every authority below is public and free to read.

Statutes link to Cornell’s Legal Information Institute; regulations to the official eCFR; publications to irs.gov. Memoranda appear under IRS guidance and memoranda.

Treasury Regulation §1.105-2: the “irrespective” test

Section 105(b) does not apply to amounts a taxpayer would be entitled to receive “irrespective of whether or not he incurs expenses for medical care.”

Treasury Regulation §1.105-2Review L2

This sentence decides the category. An arrangement that pays employees regardless of whether they received medical care fails it, even if the payment is labeled a health benefit. A plan that reimburses only documented medical care is designed to meet it. For a CPA or advisor reviewing a proposal, this is the first thing to check.

Both kinds of arrangement may use a Section 125 pre-tax election. The difference lies in what the payment depends on.

The right-hand column describes a properly designed and operated reimbursement plan. Whether a specific plan meets the test depends on its documents and operation.

IRS guidance and memoranda

Two Chief Counsel Advice (CCA) memoranda are cited most often in this area. Both concern fixed-indemnity arrangements, and both are worth reading in full. A CCA explains the IRS’s legal reasoning on a set of facts; it may not be cited as precedent.Review L8

IRS CCA 201703013 (January 2017)

Addresses a wellness program offered through an employer-provided fixed-indemnity health policy, where employees received set payments for participating in health-related activities. The memorandum concludes that such payments are includible in income and wages where the coverage was paid for with employer contributions or pre-tax salary reductions, because they are not reimbursements of medical expenses the employee incurred.

IRS CCA 202323006 (June 2023)

Addresses fixed-indemnity policies purchased through pre-tax salary reduction that pay set amounts, including for wellness activities that cost the employee nothing. The memorandum concludes that payments made without regard to unreimbursed medical expenses are includible in income and wages.

The question both memoranda turn on is whether the money pays for medical care the employee actually received, or is a set payment for an event or activity. A reimbursement plan built around the §1.105-2 test answers that question by design.

The 2023 proposed change to §1.105-2

In July 2023, the Treasury Department proposed amending Treasury Regulation §1.105-2, as part of a joint rulemaking on short-term coverage and fixed-indemnity insurance. The amendment would have stated that payments made without regard to the amount of medical expenses incurred are not excludable under Section 105(b), and would have required substantiation of each expense. When the final rule was published in April 2024, Treasury did not finalize the tax amendment and said it would continue to consider the comments received. Section 105(b) and Treasury Regulation §1.105-2 as currently written remain the rule.

Medical-expense substantiation

Every reimbursement must correspond to a qualified medical expense under IRC §213(d). In practice, each medical interaction is documented with the same CPT and ICD codes a doctor’s office would use, so each reimbursement traces back to care that occurred.

The proposed cafeteria-plan regulations (Prop. Treas. Reg. §1.125-6) call for medical expenses to be substantiated by information from an independent third party before reimbursement.

The pattern across the IRS guidance is consistent: what the IRS objects to is payment without care. What the statute protects is reimbursement of care that actually happened, documented by someone other than the person being paid. How often care must occur, and how each reimbursement is documented, should be confirmed for any specific plan by the employer’s counsel.Review L3

Plan documentation and administration

A SIMERP should have the following documents in place. An existing Section 125 plan for other benefits needs amending to include the SIMERP.

Administration by an experienced third-party administrator keeps the documentation current and the plan aligned with regulatory change. If the IRS asks questions, the record is the plan’s answer: documented interactions, the valuation on file and the written plan.Review L6

Nondiscrimination

A self-insured medical reimbursement plan must not discriminate in favor of highly compensated individuals, either in who is eligible or in what benefits are provided. Under IRC §105(h):

• Eligibility test. The plan must benefit 70% or more of all employees, or 80% or more of eligible employees if at least 70% of all employees are eligible, or a classification of employees the IRS finds nondiscriminatory.
• Benefits test. Benefits provided to highly compensated participants must be provided to all other participants.
• Excludable employees. The statute permits excluding certain employees from the count, including those with less than 3 years of service, those under age 25, part-time and seasonal employees, and employees covered by a collective bargaining agreement.

If a plan fails, the consequence falls on highly compensated individuals, whose excess reimbursements become taxable. Making benefits available to all full-time employees on uniform terms is the usual approach.Review L7

Problematic arrangements and red flags

Not every program offered under this name is built the same way.

Due-diligence checklist

A checklist for employers and their advisors. Ticks are remembered in this browser only and are not sent anywhere.

Request before signature

• The plan documents: written plan, adoption agreement, Summary Plan Description and claims procedures.Treas. Reg. §1.105-11; IRC §125
• An employee take-home model built from the employer’s actual payroll data.Financial validation
• A written explanation of how the plan meets §105(b) and §1.105-2, and any legal opinion it relies on.IRC §105(b); Treas. Reg. §1.105-2

Check first

• Is any payment made regardless of whether medical care occurred?Treas. Reg. §1.105-2
• Does the money pay for real medical care, or is it a set payment for doing an activity?CCA 201703013; CCA 202323006

Evaluation questions

• Regulatory compliance: does the design clearly fit IRC Sections 105, 125 and 213(d)?IRC §§105, 125, 213(d)
• Professional administration: is there an experienced third-party administrator?Plan administration
• Real medical services: does the program provide actual care, not just cash payments?IRC §213(d)
• Nondiscrimination: is eligibility broad and are benefits uniform?IRC §105(h)
• Documentation: is there a record behind every reimbursement?Prop. Treas. Reg. §1.125-6

Ask your own counsel

• How the plan is treated under ERISA, COBRA and HIPAA.Benefits law
• How the plan is treated under the Affordable Care Act’s market-reform rules.Benefits law
• Whether no-cost care affects HSA eligibility for employees with high-deductible plans.IRC §223
• State income-tax treatment in each state where the employer has employees.State lawReview L15

Frequently asked compliance questions

Primary sources

Everything on this page can be checked against the law itself. Read the full text, or hand this list to your own counsel.

• IRC §105: amounts received under accident and health plans.
• IRC §106: employer-provided accident and health coverage.
• IRC §125: cafeteria plans.
• IRC §213: medical expenses; subsection (d) defines medical care.
• IRC §3121: definitions for FICA, including wages.
• Treasury Regulation §1.105-2: amounts expended for medical care.
• Treasury Regulation §1.105-11: self-insured medical reimbursement plans.
• Proposed cafeteria-plan regulations (Federal Register, August 6, 2007).
• IRS Publication 15 (Circular E), Employer’s Tax Guide.
• IRS Publication 502, Medical and Dental Expenses.
• IRS CCA 201703013 (January 2017) and IRS CCA 202323006 (June 2023).

The short answer

What decides whether a particular plan’s payments qualify is how it is built and run. The rest of this guide explains the difference between a plan that meets the rules and the arrangements the IRS has warned about.

A note on the name. The IRS writes it without the E. Treasury Regulation §1.105-11 and IRS Publication 15 use “self-insured medical reimbursement plan,” sometimes abbreviated SIMRP. If an advisor uses one spelling and a proposal the other, they mean the same plan.

Why skepticism is the right starting point

Finance leaders have seen plenty of tax strategies that proved illegal, impractical or both. If someone has told you a SIMERP is risky, the right response is to look at the law directly rather than at anyone’s marketing, including ours.

This guide does three things: it shows which provisions the structure relies on, it explains the IRS memoranda that cause most of the confusion, and it sets out how a compliant program differs from the arrangements that have drawn IRS scrutiny.

The foundation: three pillars of established tax law

The structure does not depend on a creative reading of an obscure provision. It sits on three sections that underpin employer-sponsored health benefits generally.

1. IRC §105(b)

   Since 1954. Makes employer reimbursements of medical care tax-free to the employee.

2. IRC §125

   Since 1978. Powers every cafeteria plan, including health FSAs and pre-tax insurance deductions.

3. IRC §213(d)

   Defines medical care: “the diagnosis, cure, mitigation, treatment, or prevention of disease.”

These are not loopholes. They are the same provisions that govern ordinary employer health benefits.

The 2017 memorandum most often cited

The memorandum raised most often in these discussions is IRS Chief Counsel Advice 201703013. It addressed fixed-indemnity wellness plans and concluded that their payments are taxable where the coverage was paid for with employer contributions or pre-tax salary reductions, because the payments did not reimburse medical expenses the employee incurred.Review L8

The memorandum is correct, and it is about a different instrument. What it describes is a set payment triggered by an event, with no link to an expense. A reimbursement plan pays only for documented medical care.

The 2023 memorandum on wellness payments

In IRS Chief Counsel Advice 202323006, IRS lawyers considered employees who reduced their pay before tax to buy fixed-indemnity coverage that paid set amounts, including for wellness activities that cost the employee nothing. The memorandum concluded that payments made without regard to any unreimbursed medical expense are taxable income and wages.

Chief Counsel memoranda may not be cited as precedent, but the reasoning is instructive. When you read any proposal, ask one question: does the money pay for real medical care, or is it a set payment for doing an activity?

How a compliant program is built

Professional administration

An experienced third-party administrator is essential. It operates the plan, maintains the documentation and works with the employer’s payroll provider.

Nondiscrimination

IRC §105(h) requires a self-insured plan to benefit 70% or more of all employees, or 80% or more of eligible employees if at least 70% are eligible, or a classification the IRS finds nondiscriminatory. Benefits for highly compensated participants must also be provided to all other participants. Plans usually meet these tests by:Review L7

• Making benefits available to all full-time employees.
• Providing uniform benefit amounts regardless of compensation.
• Excluding only the categories the statute permits, such as employees with less than 3 years of service, those under 25, and part-time and seasonal employees.

Substantiation

Every reimbursement must correspond to a qualified medical expense under IRC §213(d). A well-run program documents care as it is delivered: when an employee uses virtual primary care, mental-health counseling or pharmacy services, the care platform records the interaction with standard CPT and ICD codes. How often care must occur, and how each reimbursement is documented, should be confirmed for a specific plan by the employer’s counsel.Review L3

Plan documentation

A compliant program comes with complete documents:

• A written Section 125 cafeteria plan, amended to include the SIMERP even if one already exists for other benefits.
• A Section 105 plan document and Summary Plan Description, as Treasury Regulation §1.105-11 requires a written plan.
• HIPAA privacy notices.

Telling a compliant program from a problematic one

Not every program offered under this name is built the same way.

The compliance framework that protects you

When evaluating a program, confirm that it includes:

• Legal support you can see. If a program says it relies on a legal opinion, ask for it and ask who wrote it.Review L1
• A paper trail, not a promise. Every medical interaction carries the CPT and ICD codes a doctor’s office would use, so each reimbursement traces back to real care.
• Ongoing compliance monitoring. Tax rules change. The administrator should track changes and update the plan.
• Integration with existing benefits. The plan should sit alongside health insurance, dental, vision and other benefits without conflicting with them.

Common misconceptions

“It’s a loophole that will be closed.”

The underlying provisions have been in the Code for about 70 years and are fundamental to employer-sponsored healthcare. The rules can change, though. In July 2023, Treasury proposed amending Treasury Regulation §1.105-2 so that Section 105(b) would not cover payments made without regard to actual medical expenses, and so that each reimbursed expense would need substantiation. In the April 2024 final rule, Treasury did not finalize that change and said it would continue to consider the comments. Section 105(b) and §1.105-2 as currently written remain the rule.Review L9

“The IRS will audit us.”

A plan’s defense is its record: documented medical interactions, the written plan and, where values are set in advance, the actuarial valuation. Programs that keep that record can answer IRS questions with documents.Review L6

“It’s too complex to implement.”

The complexity sits with the administrator, which works with the employer’s payroll provider to set up the election. The timeline depends mainly on payroll setup and plan documents.

“Employees won’t understand it.”

What employees see is simple: higher take-home pay and access to medical care. The mechanics happen behind the scenes.

The CFO’s evaluation framework

Five questions decide whether a program deserves serious consideration.

If the answer to all five is yes, the program is built the way the rules require. Use the full due-diligence checklist for a line-by-line review.

The bottom line for financial leaders

Primary sources: check this yourself

Nothing in this guide should be taken on anyone’s word, including ours. Every authority is public and free. Hand this list to your own counsel and let them work from the law itself.

• IRC §105: amounts received under accident and health plans; §105(b) is the reimbursement exclusion and §105(h) the nondiscrimination rule.
• IRC §106: employer-provided coverage excluded from employee income.
• IRC §125: cafeteria plans and the pre-tax election.
• IRC §213(d): the definition of medical care.
• IRC §3121(a)(2): the FICA wage exclusion for medical care payments.
• Treasury Regulation §1.105-2: the “irrespective” test.
• Treasury Regulation §1.105-11: the plan definition, the written-plan requirement and the §105(h) tests.
• Proposed cafeteria-plan regulations (§§1.125-1 to 1.125-7, 2007): salary reductions as employer contributions; substantiation of medical expenses.Review L11
• IRS Publication 15 (Circular E): payroll-tax treatment of self-insured medical reimbursement plan payments.
• IRS Publication 502: what qualifies as medical care.
• IRS CCA 202323006 (June 2023): fixed-indemnity payments where the employee had no unreimbursed medical expense.
• IRS CCA 201703013 (January 2017): fixed-indemnity wellness payments funded by employer contributions or salary reduction.

The pattern across the IRS guidance is consistent. What the IRS objects to is payment without care. What the statute protects is reimbursement of care that actually happened, documented by someone other than the person being paid.

Your next step

The difference between a compliant reimbursement plan and a problematic fixed-payment arrangement is substantial, and it is visible in the documents. Review the law, review the plan documents with your own advisors, and evaluate any program against the five questions above.

This guide is provided for educational purposes and is not legal or tax advice. Every business is different; consult your own qualified tax and legal advisors before adopting any plan.

History and background

The tax provisions behind a SIMERP have been in the Internal Revenue Code for decades. What has changed more recently is the IRS’s attention to arrangements that use the same provisions without tying payments to medical care.

1. 1954

   The core provisions

   The Internal Revenue Code of 1954 includes §§105, 106 and 213, and the FICA wage definition in §3121.

2. 1978

   Section 125

   Cafeteria plans and the pre-tax election are added to the Code.

3. Aug 2007

   Proposed cafeteria-plan regulations

   Treasury proposes comprehensive §125 regulations, including employer-contribution treatment and substantiation of medical expenses.

4. Jan 2017

   CCA 201703013

   IRS Chief Counsel addresses fixed-indemnity wellness payments.

5. Jun 2023

   CCA 202323006

   IRS Chief Counsel holds fixed-indemnity payments made without regard to medical expenses to be taxable wages.

6. Jul 2023

   Proposed change to §1.105-2

   Treasury proposes that §105(b) not cover payments made without regard to actual medical expenses.

7. Apr 2024

   Change not finalized

   The final rule leaves out the §1.105-2 amendment; Treasury continues to consider comments.Review L9

IRS Publications 15 and 502 are reissued every year; always check the current edition.

IRS document library

Every authority referenced on this site, with a link to the full official text. Read them in their entirety, and share them with your own advisors.

12 sources

• IRC §105: Amounts received under accident and health plans (opens in a new tab)

  Internal Revenue Code. Cornell Legal Information Institute.

  Subsection (b) excludes reimbursements of medical care from income. Subsection (h) sets the nondiscrimination rules for self-insured medical reimbursement plans.

• IRC §106: Contributions by employer to accident and health plans (opens in a new tab)

  Internal Revenue Code. Cornell Legal Information Institute.

  Excludes employer-provided accident and health coverage from employee income.

• IRC §125: Cafeteria plans (opens in a new tab)

  Internal Revenue Code. Cornell Legal Information Institute.

  Permits employees to choose between cash and qualified benefits, including the pre-tax election that funds a SIMERP.

• IRC §213: Medical, dental, etc., expenses (opens in a new tab)

  Internal Revenue Code. Cornell Legal Information Institute.

  Subsection (d) defines medical care, the only care a SIMERP may reimburse.

• IRC §3121: Definitions (FICA) (opens in a new tab)

  Internal Revenue Code. Cornell Legal Information Institute.

  Defines wages for Social Security and Medicare tax; subsection (a)(2) addresses medical care payments.

• Treasury Regulation §1.105-2: Amounts expended for medical care (opens in a new tab)

  Final regulation. Electronic Code of Federal Regulations.

  Contains the “irrespective” test that separates reimbursement plans from fixed payments.

• Treasury Regulation §1.105-11: Self-insured medical reimbursement plans (opens in a new tab)

  Final regulation. Electronic Code of Federal Regulations.

  Defines the plan, requires a written plan, and implements the §105(h) nondiscrimination tests.

• Proposed regulations: Employee Benefits, Cafeteria Plans (opens in a new tab)

  Proposed regulations. Federal Register, August 6, 2007.

  Proposed §§1.125-1 through 1.125-7, including employer-contribution treatment of salary reductions and substantiation of medical expenses.

• IRS Publication 15 (Circular E): Employer’s Tax Guide (opens in a new tab)

  IRS publication. Reissued annually.

  States the payroll-tax treatment of reimbursements under a self-insured medical reimbursement plan.

• IRS Publication 502: Medical and Dental Expenses (opens in a new tab)

  IRS publication. Reissued annually.

  The IRS’s working list of what counts as medical care.

• IRS Chief Counsel Advice 201703013 (PDF, opens in a new tab)

  Chief Counsel memorandum. January 2017. Not precedential.

  Fixed-indemnity wellness payments funded by employer contributions or salary reduction are includible in income and wages.

• IRS Chief Counsel Advice 202323006 (PDF, opens in a new tab)

  Chief Counsel memorandum. June 2023. Not precedential.

  Fixed-indemnity payments made without regard to unreimbursed medical expenses are includible in income and wages.

Professional due diligence

For an advisor reviewing a proposal for a client, the review comes down to three steps:

1. Identify the instrument. A self-insured medical reimbursement plan: a §125 pre-tax election, reimbursement of §213(d) medical care, and exclusion under §§105 and 106.
2. Apply the irrespective test first. Treasury Regulation §1.105-2 excludes amounts paid irrespective of whether medical care occurs. A sound design reimburses only actual care and documents every interaction.
3. Review the documents and the numbers before signature. The written plan, adoption agreement, Summary Plan Description and claims procedures, and an employee take-home model built from the client’s actual payroll.

Open the full due-diligence checklist

Key terms

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Actuarial valuation

An independent actuary’s determination of the value of the medical care a plan provides, used where reimbursement amounts are set in advance. It does not by itself establish that a payment is excludable.Treas. Reg. §1.105-2 context

Chief Counsel Advice (CCA)

A memorandum from IRS lawyers applying the law to a set of facts. CCAs may not be cited as precedent. CCA 201703013 and CCA 202323006 address fixed-indemnity arrangements.IRS written determinations

CPT and ICD codes

Standard procedure and diagnosis codes used to document medical care, showing that each reimbursement traces back to an actual medical interaction.Substantiation practice

FICA

Social Security and Medicare payroll taxes. The employer pays a matching share on employee wages; lowering taxable wages lowers both shares.IRC §§3101, 3111, 3121

Fixed-indemnity arrangement

A plan that pays a set amount for an event or activity, with no connection to actual medical expenses. The subject of the IRS memoranda in this area.CCA 201703013; CCA 202323006

Irrespective test

The rule that §105(b) does not apply to amounts paid “irrespective of whether or not he incurs expenses for medical care.” It separates reimbursement plans from fixed payments.Treas. Reg. §1.105-2

Nondiscrimination

Rules requiring a self-insured plan to cover a broad share of employees and not favor highly compensated individuals in eligibility or benefits.IRC §105(h); Treas. Reg. §1.105-11

Publication 15 (Circular E)

The IRS Employer’s Tax Guide, which states that reimbursements under a self-insured medical reimbursement plan are not wages for Social Security, Medicare or FUTA purposes.IRS Publication 15

Publication 502

The IRS’s guide to what counts as medical care.IRS Publication 502

Pre-tax election (salary reduction)

An employee’s choice to have part of pay directed to a qualified benefit before tax. Under the cafeteria-plan rules those amounts are treated as employer contributions.IRC §125; Prop. Treas. Reg. §1.125-1

Section 105(b)

Excludes from income amounts paid to reimburse an employee’s medical care.IRC §105(b)

Section 106

Excludes employer-provided accident and health coverage from employee income.IRC §106

Section 125 (cafeteria plan)

Permits pre-tax elections for qualified benefits. Health FSAs and pre-tax health-insurance deductions operate under it.IRC §125

Section 213(d)

Defines medical care, including “the diagnosis, cure, mitigation, treatment, or prevention of disease.” A SIMERP may reimburse only care within this definition.IRC §213(d)

Section 3121(a)(2)

Part of the FICA wage definition, excluding certain medical care payments from wages.IRC §3121(a)(2)

SIMERP (also SIMRP)

Self-insured medical expense reimbursement plan. The IRS’s wording is “self-insured medical reimbursement plan.”Treas. Reg. §1.105-11; IRS Publication 15

Summary Plan Description (SPD)

The plain-language description of the plan provided to participants.Plan documentation

Substantiation

Documentation that each reimbursement is for a qualified medical expense, ideally from someone other than the person being paid.Prop. Treas. Reg. §1.125-6

Third-party administrator (TPA)

The outside administrator that operates the plan, maintains compliance documentation and works with the payroll provider.Plan administration

Publication status

This build is a review draft. It should not be published until every High item below is resolved. Priority reflects publication risk, not a view on whether a statement is correct.

Financial items

Legal items

Brand and program items