Self-Insured Medical Reimbursement Plans (SIMRP) represent one of the most tax-efficient employee benefit strategies available to American employers today. Rooted in IRS Section 105, these plans allow businesses to provide comprehensive health benefits while simultaneously reducing their FICA tax burden and improving employee wellness outcomes.
Yet despite their significant advantages, SIMRPs remain underutilized by many CFOs and financial decision-makers who could benefit most from implementing them. This comprehensive guide explains what SIMRPs are, how they work, their legal framework, and why they deserve serious consideration in your organization’s benefit strategy.
A Self-Insured Medical Reimbursement Plan is an employer-funded benefit program that reimburses employees for qualified medical expenses on a tax-advantaged basis. Unlike traditional health insurance where premiums are paid to an insurance carrier, a SIMRP allows the employer to directly reimburse employees for their healthcare costs while receiving favorable tax treatment for both the employer and employee.
The “self-insured” designation means the employer assumes the financial risk and responsibility for providing these benefits, rather than purchasing insurance coverage from a third-party carrier. However, this doesn’t mean employers are exposed to unlimited liability—proper plan design includes cost controls, annual maximums, and covered expense definitions that allow predictable budgeting.
SIMRPs derive their tax advantages from IRS Code Section 105, which has existed since 1954 and provides specific rules for employer-sponsored accident and health plans. Under Section 105, employers can provide medical expense reimbursements to employees that are:
[Source: Internal Revenue Code Section 105(b), 26 U.S.C. § 105(b)]
This triple tax advantage creates significant financial value that we’ll examine in detail later in this article.
At its core, a SIMRP operates through a straightforward process:
The employer creates a written plan document that defines:
[Source: IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits]
Employees make pre-tax contributions from their payroll, typically through salary reduction or flexible benefit arrangements. These contributions are excluded from the employee’s W-2 income, avoiding federal income tax, FICA tax (7.65% employee portion), and in most cases, state and local income taxes.
Employees incur qualified medical expenses as defined by IRS Section 213(d). These may include:
Employees must provide proper documentation of these expenses, typically including receipts, explanation of benefits (EOBs), or invoices showing the date of service, provider, patient name, and amount paid.
Once the employer verifies the expense qualifies under the plan document and Section 213(d), the reimbursement is paid to the employee tax-free. This reimbursement can occur through regular payroll, separate benefit payments, or direct payment to medical providers, depending on plan design.
[Source: IRS Revenue Ruling 2002-80]
The tax benefits of SIMRPs create measurable value for both employers and employees. Let’s examine the specific advantages and quantify their impact.
The primary financial benefit for employers comes from reduced Federal Insurance Contributions Act (FICA) taxes. FICA consists of:
[Source: Social Security Administration, 2024]
When employee wages are reduced through salary reduction agreements, the employer’s FICA obligation decreases proportionally.
Example Calculation:
For an employee contributing $1,220 monthly ($14,640 annually) to a SIMRP:
For a company with 100 eligible employees, this translates to $112,000 in annual FICA tax savings.
For larger employers or those with higher contribution levels, these savings compound significantly. An employer with 500 employees at the same contribution level would save $560,000 in FICA taxes annually.
SIMRP benefits are deductible as ordinary and necessary business expenses under IRC Section 162, reducing the employer’s taxable income. This deduction applies to the full amount of benefits provided, creating additional tax value based on the employer’s effective tax rate.
[Source: Internal Revenue Code Section 162]
Employees benefit from SIMRP participation through multiple tax savings:
Using the same $1,220 monthly contribution example ($14,640 annually), an employee in the 22% federal tax bracket saves approximately:
Employees save their share of FICA taxes on SIMRP contributions:
In most states, SIMRP contributions are also excluded from state and local income taxes. For an employee in a state with a 5% income tax:
Total annual employee tax savings: $3,220.80 + $1,119.96 + $732.00 = $5,072.76
This represents a 34.65% effective discount on healthcare expenses for this employee—meaning every dollar they spend on qualified medical expenses through the SIMRP costs them only 65 cents in after-tax dollars compared to paying out-of-pocket with post-tax income.
According to the Centers for Medicare & Medicaid Services (CMS), the average American spent $12,914 on healthcare in 2021, with a significant portion going to out-of-pocket expenses not covered by traditional health insurance.
[Source: Centers for Medicare & Medicaid Services, National Health Expenditure Data, 2021]
The tax savings generated through SIMRPs allow employees to access additional benefits that might otherwise be unaffordable, including:
Well-structured SIMRP programs allow employees to access an average of $1,800 in additional annual benefits funded through tax savings, effectively increasing their total compensation package without reducing net take-home pay.
Understanding how SIMRPs compare to other common benefit structures helps clarify their unique position in the benefits landscape.
While SIMRPs are technically a type of HRA, there are important distinctions:
Health Reimbursement Arrangements (HRAs) are a broader category that includes several specific types of plans (QSEHRA, ICHRA, GCHRA, etc.) with varying rules about integration with group health plans, contribution limits, and eligibility requirements.
SIMRPs specifically refer to self-insured arrangements under Section 105 that can be structured as standalone plans or integrated with group health coverage. SIMRPs often provide more flexibility in plan design and covered expenses than some HRA variations.
[Source: IRS Notice 2002-45; Treasury Regulation §1.105-11]
Health Savings Accounts are individually owned accounts that require enrollment in a high-deductible health plan (HDHP). HSAs have specific contribution limits ($4,150 for individuals, $8,300 for families in 2024) and the funds roll over year to year, becoming the employee’s property.
[Source: IRS Revenue Procedure 2023-23]
SIMRPs are employer-owned plans with no requirement for HDHP enrollment. They can provide benefits beyond HSA contribution limits, and unused benefits typically don’t carry forward or transfer to employees who leave the company. However, SIMRPs offer the same triple tax advantage: deductible to employer, excluded from employee income, and exempt from payroll taxes.
Flexible Spending Accounts allow employees to contribute pre-tax dollars to pay for qualified medical expenses, with a $3,200 annual limit (2024) and “use-it-or-lose-it” provisions (though employers can allow limited carryovers or grace periods).
[Source: IRS Revenue Procedure 2023-34]
SIMRPs differ in several key ways:
Properly structured SIMRPs must satisfy several legal requirements to maintain their tax-advantaged status. Failure to comply with these rules can result in the plan losing its favorable tax treatment, exposing both employer and employees to tax liabilities and penalties.
IRS regulations require a formal written plan document that includes:
[Source: ERISA Section 402(a)(1); 29 U.S.C. § 1102(a)(1)]
Section 105(h) prohibits discrimination in favor of highly compensated individuals (HCIs). The plan must satisfy both eligibility testing and benefits testing:
Eligibility Testing: The plan must benefit one of the following:
Benefits Testing: All benefits must be provided to all participants on the same terms. HCIs cannot receive proportionally greater benefits than non-HCIs.
[Source: Internal Revenue Code Section 105(h); Treasury Regulation §1.105-11(c)]
Failure to satisfy these tests results in the excess reimbursements to HCIs being included in their taxable income.
Every reimbursement must be substantiated to verify it was for a qualified medical expense under Section 213(d). Documentation requirements include:
[Source: IRS Revenue Ruling 2003-43]
Many administrators use third-party verification services or require submission of EOBs from insurance carriers to satisfy substantiation requirements efficiently.
SIMRPs must navigate several ACA provisions:
Market Reforms: Standalone SIMRPs that are group health plans are generally prohibited under ACA market reforms (they violate annual and lifetime limit restrictions). However, SIMRPs integrated with a group health plan or structured as excepted benefits can remain compliant.
[Source: ACA Section 2711; 45 CFR §147.126]
Reporting Requirements: Applicable Large Employers (ALEs) with 50+ full-time equivalent employees must comply with ACA reporting (Forms 1094-C and 1095-C) and determine whether their SIMRP offerings satisfy minimum essential coverage and minimum value requirements.
[Source: Internal Revenue Code Sections 6055 and 6056]
Proper legal structuring is essential. Most compliant SIMRP implementations are either:
Working with experienced benefits counsel is critical to ensure ACA compliance.
Successfully implementing a SIMRP requires careful attention to plan design, administration, and communication.
Eligible Employees: Will you include all employees, or limit to certain classes (full-time, salaried, etc.)? Remember that any classifications must satisfy Section 105(h) non-discrimination rules.
Contribution Levels: How much will employees contribute annually? Typical ranges are $600-$3,000 per employee, depending on the comprehensiveness of other health benefits and employer objectives.
Covered Expenses: Will you reimburse all Section 213(d) expenses, or limit to specific categories (prescriptions, preventive care, dental/vision)? Broader coverage creates more value but requires more administrative oversight.
Annual Maximums: What’s the maximum annual benefit per employee? This creates predictable costs and prevents adverse selection concerns.
Family Coverage: Will you extend coverage to spouses and dependents? How will dependent coverage be structured?
Effective SIMRP administration requires:
Claims Processing: A system to receive, review, substantiate, and approve claims efficiently. Options include in-house administration, third-party administrators (TPAs), or benefits administration platforms.
Compliance Monitoring: Regular non-discrimination testing, documentation review, and legal compliance verification.
Record Keeping: Secure storage of plan documents, claims records, reimbursement documentation, and testing results for IRS audit purposes.
Financial Management: Accounting systems to track contributions, reimbursements, and reserve requirements (if applicable).
Clear communication is essential for successful SIMRP adoption:
Self-Insured Medical Reimbursement Plans form the foundation of more sophisticated benefit strategies like Wellness Integrated Medical Plan Expense Reimbursement WIMPER programs. WIMPER takes the basic SIMRP concept and integrates it with participatory wellness initiatives, preventive care incentives, and comprehensive employee health engagement.
By understanding SIMRPs, you’ve grasped the fundamental tax and compliance mechanics that make WIMPER programs possible. WIMPER represents an evolution of the SIMRP concept—one that redirects FICA tax savings into enhanced employee wellness benefits, creating a virtuous cycle of reduced costs and improved health outcomes.
Reality: SIMRPs can work for businesses of all sizes. While larger employers may achieve greater aggregate tax savings, the percentage benefits remain proportional. A 10-employee firm with average contributions of $14,640 per employee saves $11,200 in FICA taxes annually—a 7.65% return on payroll that compounds year after year.
Reality: With modern benefits administration technology, SIMRP administration is straightforward. Third-party administrators can handle claims processing, compliance testing, and substantiation for modest fees (typically $3-$8 per employee per month), making professional administration accessible even for small employers.
Reality: When properly communicated, employees quickly grasp the value proposition: tax-free reimbursement for healthcare expenses they’re already incurring. The 35%+ effective discount on medical costs is highly tangible and appreciated. Clear communication materials and ongoing education drive engagement and satisfaction.
Reality: SIMRPs include annual maximum benefits, covered expense definitions, and eligibility rules that create predictable cost structures. Unlike traditional insurance where the carrier assumes claims risk, SIMRPs give employers control over plan design and cost containment—but “self-insured” doesn’t mean “uncontrolled.”
Let’s examine a concrete example to understand the financial return on implementing a SIMRP.
Company Profile:
SIMRP Implementation:
Financial Analysis:
Annual Employee Contributions: $14,640 × 200 = $2,928,000
Employer FICA Savings: $2,928,000 × 7.65% = $224,000
Value Provided to Employees:
Key Metrics:
This scenario demonstrates how SIMRPs create win-win outcomes: employers reduce payroll tax costs significantly, while employees receive greater value from every healthcare dollar they spend plus access to enhanced benefits at no net cost to their take-home pay.
Generally, any expense that qualifies as a medical expense under IRS Section 213(d) can be included. This includes doctor visits, prescriptions, dental care, vision care, mental health services, preventive care, and many other healthcare expenses. However, premiums for individual health insurance cannot typically be reimbursed through a SIMRP.
[Source: Internal Revenue Code Section 213(d); IRS Publication 502]
Yes, SIMRPs can be structured to complement existing group health insurance, HSAs, FSAs, and other benefits. However, careful coordination is required to ensure compliance with IRS regulations and avoid prohibited duplicate coverage scenarios. Most commonly, SIMRPs are integrated with high-deductible health plans or structured to cover expenses not covered by primary insurance.
This depends on plan design. Unlike FSAs with “use-it-or-lose-it” rules, SIMRPs can allow unused benefits to carry forward, though the employer is not required to do so. Common approaches include limited carryovers, forfeiture of unused amounts, or conditional carryover based on employment status. The plan document governs these rules.
SIMRP benefits are excluded from Box 1 (wages) on Form W-2, resulting in lower reportable income for employees. However, if the plan is discriminatory and excess reimbursements are provided to highly compensated individuals, those excess amounts must be included in their taxable income and reported on Form W-2.
[Source: IRS Form W-2 Instructions]
Yes, but inclusion of part-time employees must be consistent with the plan’s non-discrimination rules under Section 105(h). If you include part-time employees in one employee class, you generally must include them in other classes as well to avoid discrimination issues.
The IRS requires “substantiation” showing that reimbursements were for qualified medical expenses. Acceptable documentation includes:
Credit card receipts alone are generally insufficient—documentation must identify the medical nature of the expense.
SIMRPs and HSAs can coexist, but careful structuring is required. An HSA requires enrollment in a high-deductible health plan and generally prohibits “other coverage.” A SIMRP can be structured as:
These structures preserve HSA eligibility while providing SIMRP benefits.
[Source: IRS Revenue Ruling 2004-45; IRS Notice 2004-50]
Non-compliance can result in:
These consequences make proper plan design, administration, and legal compliance essential.
[Source: Internal Revenue Code Section 4980D]
Self-Insured Medical Reimbursement Plans represent one of the most underutilized tax planning opportunities available to American employers. With proper structure and administration, SIMRPs create measurable value through:
For CFOs evaluating benefit strategies, SIMRPs deserve serious consideration—not as a replacement for existing health coverage, but as a complementary benefit that improves tax efficiency and employee value simultaneously.
The foundation you’ve built by understanding SIMRPs prepares you for the next evolution in tax-advantaged health benefits: WIMPER programs that integrate medical reimbursement with comprehensive wellness initiatives. To learn how WIMPER builds on the SIMRP framework to create even greater value, continue exploring The WIMPER Institute’s resources.