Is SIMERP Legal? The Definitive Guide to SIMERPs (IRC §105)

A note on the name: This instrument is a self-insured medical expense reimbursement plan (SIMERP), also written SIMRP under the wording the IRS itself uses in Treasury Regulation §1.105-11 and IRS Publication 15. Both spellings are correct and both refer to the same plan; the IRS writes it without the E.

Let me prove it to you.

As a CFO, you're right to be skeptical. You've probably seen dozens of "revolutionary tax strategies" that turned out to be either illegal, impractical, or both. Someone warned you SIMERP might be risky, and now you need real answers — not sales pitches.

Here's what makes this analysis different: I'm going to show you exactly why SIMERP works, address the specific IRS memorandum that creates confusion, and explain how legitimate programs differ from the schemes that got companies in trouble.

The Foundation: Three Pillars of Established Tax Law

SIMERP isn't some creative interpretation of obscure tax code. It operates under a precise framework of Internal Revenue Code sections that form the backbone of American employee benefits:

Tax Code Foundations for SIMERP Benefits

The SIMERP plan is meticulously structured around specific IRS Code Sections to ensure maximum tax efficiency and benefit delivery for both employers and employees. Quarterly and annual reports are provided to your team to keep you compliant with ERISA, HIPAA, and ACA.

Wellness & Compliance

IRC §106(a): Employer contributions to health plans are excludable from gross income.
IRC §213(d): Defines medical care expenses, including those for preventive health.
IRC §105(b): Excludes amounts received from accident and health plans for medical care from gross income.
ERISA, ADA, HIPAA: Ensures compliance with key employee welfare and privacy regulations.

Pre-Tax Advantages

IRC §125 (Cafeteria Plans): Allows employees to choose between taxable cash and non-taxable benefits, enabling pre-tax premium deductions.
IRC §106(a): Reinforces the tax-free status of employer contributions to accident and health plans, crucial for pre-tax treatment.
IRC §213(d): Specifies what qualifies as medical expenses, allowing these costs to be paid with pre-tax dollars.

Post-Tax Reimbursement

IRC §105(b): Allows for post-tax reimbursement of medical expenses that are not compensated by insurance or otherwise, under a self-insured medical expense reimbursement plan.
Treas. Reg. §1.105-11(k): Specific regulations governing self-insured medical reimbursement plans (SIMERPs), ensuring non-discrimination and compliance.
IRC §104(a)(3): Excludes from gross income amounts received through accident or health insurance for personal injury or sickness.

These Internal Revenue Code sections collectively create a robust framework for delivering tax-advantaged health and wellness benefits to employees. These aren't loopholes — they're the same codes that have governed employer-sponsored healthcare for generations.

The IRS Memorandum Everyone Worries About (And Why You Shouldn't)

Let's address the elephant in the room: IRS Chief Counsel Memorandum 201703013.

This 2017 memorandum sent shockwaves through the benefits industry by challenging certain "fixed indemnity" wellness plans. Critics of SIMERP often cite this memo as proof that these programs are problematic.

The Key Distinction Missing From The Debate

The memo specifically targeted fixed indemnity arrangements that paid cash regardless of actual medical expenses. Legitimate SIMERP programs are fundamentally different.

Fixed Indemnity Schemes (Targeted)

•Pay a set amount for doing wellness activities
•No connection to actual medical expenses incurred
•Operate like taxable cash bonuses disguised as benefits
•Example: "$50 for getting a flu shot"

Legitimate SIMERP (Compliant)

•Reimburse actual medical care expenses under IRC §213(d)
•Require substantiation of medical services received
•Provide real healthcare via a licensed virtual care clinic
•Never pay a flat amount just for doing an activity

The distinction is critical. One is a disguised cash scheme. The other is a legitimate medical reimbursement arrangement.

The IRS Said Wellness Payments Are Taxable (CCA 202323006)

In a June 2023 memo (CCA 202323006), IRS lawyers looked at a plan where employees cut their pay before tax to buy a fixed indemnity insurance policy. The policy paid a set amount each month for doing health or wellness activities, some of them preventive care.

The IRS said the monthly payments are taxable income and wages, because the employee had no medical expense left over: the activity cost nothing, or other coverage had paid for it.

The memo can't be cited as precedent. Still, when you read a proposal, ask one question: does the money pay for real medical care, or is it a set payment for doing an activity?

How Legitimate SIMERP Programs Ensure Compliance

Professional Third-Party Administration is non-negotiable. Legitimate programs use experienced administrators who understand the compliance requirements and maintain proper documentation.

The 70% Non-Discrimination Test (IRC §105(h))

IRC Section 105(h) requires that self-insured plans benefit at least 70% of all employees (or 80% of eligible employees if 70% are eligible to participate). This prevents discrimination in favor of highly compensated individuals.

Compliant SIMERP programs satisfy this by:

Making benefits available to all full-time employees
Providing uniform benefit amounts regardless of compensation level
Excluding only permitted categories (part-time, seasonal, or under 90-day employees)

Substantiation Requirements

Every reimbursement must be substantiated as a qualified medical expense under IRC 213(d). Modern SIMERP programs accomplish this through integrated wellness platforms that automatically document service delivery.

For example, when an employee uses the healthcare platform for virtual primary care, mental health counseling, or prescription services, the platform creates the required documentation. The annual requirement is a single documented interaction with a licensed clinician — a virtual primary care visit is the ordinary way it happens.

Proper Plan Documentation

Legitimate programs provide comprehensive documentation including:

Section 125 Document

Written cafeteria plan updated for SIMERP election.

Section 105 Plan & SPD

Summary Plan Description provided to participants.

HIPAA Notices

Required privacy policy & data protection protocols.

Real-World Validation: Who's Already Using SIMERP?

The most compelling evidence of SIMERP's legitimacy comes from who's implementing it:

Government Entities

Multiple U.S. state, city, and county governments have adopted SIMERP after extensive legal review. These aren't risk-taking organizations — they're conservative public entities with strict fiduciary duties.

Companies of All Sizes

From 20-employee small businesses to corporations with 200,000 employees, organizations across every industry are implementing SIMERP.

Professional Endorsements

CPAs, benefits consultants, and tax attorneys regularly recommend properly structured SIMERP programs to their clients.

Differentiating Legitimate SIMERP from Problematic Arrangements

Not all programs calling themselves "SIMERP" are created equal. Here's how to identify legitimate programs:

Red Flags (Avoid These)

Promise cash payments for wellness activities
No real medical services provided
Lack professional third-party administration
No substantiation or documentation requirements
Marketed primarily as a "tax loophole"

Green Flags (Look for These)

Comprehensive wellness platform with real medical services
Professional administration & compliance oversight
Clear substantiation and documentation procedures
Legal opinion support from qualified tax attorneys
Transparent explanation of IRS code compliance

The Compliance Framework That Protects You

When evaluating SIMERP, ensure the program includes these four core pillars:

1Professional Legal Support

Reputable programs are backed by formal legal opinions from tax attorneys who specialize in employee benefits.

2A Paper Trail, Not a Promise

Every medical interaction carries the same CPT and ICD codes a doctor's office would use, so every reimbursement traces back to real care.

3Ongoing Compliance Monitoring

Tax laws evolve. Your SIMERP administrator should continuously monitor regulatory changes and update the program accordingly.

4Integration with Existing Benefits

SIMERP should complement, not compete with, your current benefits. It works alongside health, dental, and vision insurance without conflicts.

Common Misconceptions Debunked

"It's a loophole that will be closed"

These tax codes have existed for 70 years. They're fundamental to employer-sponsored healthcare in America. In 2023, Treasury proposed a change to Treasury Regulation 1.105-2 regarding un-substantiated payments. In April 2024, Treasury left the change out of the final rule to study comments further. Section 105(b) as written today remains the rule.

"The IRS will audit us"

The answer to any IRS question is the record. Every medical interaction is documented with CPT/ICD codes, the valuation is on file, and the formal plan document is written.

"It's too complex to implement"

Professional administrators handle the complexity. We work directly with your payroll provider (ADP, Paychex, Gusto, etc.) to implement necessary codes. Programs go live within 30 to 60 days.

"Employees won't understand it"

Employees see increased take-home pay and gain 24/7 access to virtual primary care, mental health counseling, and telehealth. The administrative complexity happens behind the scenes.

Is SIMERP Legal? The Definitive Guide to SIMERPs

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