Is SIMERP Legal? The Definitive Guide to SIMERPs

Yes. A properly structured SIMERP is legal, and it is not a novel structure. §105(b), in the Code since 1954, excludes medical expense reimbursements from income. §213(d) defines the care that qualifies. §125, added in 1978, permits the pre-tax election that funds it. IRS Publication 15 states the payroll-tax treatment outright.

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. If your CPA or attorney used the other spelling, they were abbreviating the phrase the regulation uses. The full explanation is at SIMRP or SIMERP? Why You Will See Both.

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 three sections of the Internal Revenue Code that form the backbone of American employee benefits:

IRC Section 105(b) - Established in 1954, this section makes employer medical expense reimbursements tax-free. You use this every time you reimburse an employee for medical expenses.

IRC Section 125 - Created in 1978, this powers every cafeteria plan in America. Your health FSA and your pre-tax health insurance deductions operate under this section.

IRC Section 213(d) - Defines what qualifies as deductible medical care, including "the diagnosis, cure, mitigation, treatment, or prevention of disease."

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.

Here's what they're missing: The memo specifically targeted fixed indemnity arrangements that paid cash regardless of actual medical expenses.

Legitimate SIMERP programs are fundamentally different:

Fixed Indemnity Schemes (What the IRS Opposes):

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

Legitimate SIMERP (What the IRS Accepts):

• Reimburse actual medical care expenses under IRC 213(d)
• Require substantiation of medical services received
• Provide access to real healthcare through a licensed virtual care clinic
• No fixed cash payments for activities

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

Recent IRS Clarification: The 2023 Update That Strengthened SIMERP

In June 2023, IRS Chief Counsel Advice 202323006 provided additional clarity that actually strengthened the position of properly structured SIMERP programs.

The guidance emphasized that compliant reimbursement arrangements must be tied to actual medical care services - exactly how legitimate SIMERP programs operate.

This wasn't a warning against SIMERP. It was a roadmap for compliance.

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 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
• Excluding only permitted categories (part-time, seasonal, new 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:

• Written Section 125 cafeteria plan (updated to include SIMERP)
• Section 105 plan document and Summary Plan Description
• HIPAA privacy notices
• Annual non-discrimination testing results

We provide all of this documentation - even if you already have a Section 125 plan for other benefits, it needs updating to include SIMERP.

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 businesses to corporations with 200,000 employees, organizations across every industry are implementing SIMERP.

Professional Endorsement: 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 requirements
• Marketed primarily as a "tax loophole"

Green Flags (Look for These):

• Comprehensive wellness platform with real medical services
• Professional administration and 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:

1. Professional Legal Support
   Reputable programs are backed by formal legal opinions from tax attorneys who specialize in employee benefits.
2. Audit Protection
   Look for programs that include audit protection - typically $500,000 for companies under 1,000 employees, with individual employee coverage up to $10,000.
3. Ongoing Compliance Monitoring
   Tax laws evolve. Your SIMERP administrator should continuously monitor regulatory changes and update the program accordingly.
4. Integration with Existing Benefits
   SIMERP should complement, not compete with, your current benefits. It works alongside your health insurance, dental, vision, and other offerings without creating 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.

"The IRS will audit us"
Properly documented SIMERP programs don't increase audit risk. The comprehensive documentation actually makes you more audit-ready.

"It's too complex to implement"
Professional administrators handle the complexity. We work directly with your payroll provider to implement the necessary codes. Most programs go live within 30 to 60 days.

"Employees won't understand it"
Employees see increased take-home pay and get access to comprehensive wellness services. The complexity happens behind the scenes.

The Strategic CFO’s Evaluation Framework

As you evaluate SIMERP, consider these factors:

Regulatory Compliance: Does the program clearly comply with IRC Sections 105, 125, and 213(d)?

Professional Administration: Is there experienced third-party administration with a track record of compliance?

Real Medical Services: Does the program provide actual healthcare services, not just cash payments?

Documentation Standards: Will you receive comprehensive plan documents and ongoing compliance support?

Risk Mitigation: Is there audit protection and legal backing?
If the answer to all five questions is yes, you're looking at a legitimate SIMERP program.

Schedule your discovery call.

The Bottom Line for Financial Leaders

SIMERP represents the convergence of three established areas of tax law to create mutual benefit for employers and employees. It's not revolutionary - it's evolutionary.
The programs that got companies in trouble weren't SIMERP programs at all. They were fixed indemnity schemes masquerading as medical reimbursements. The IRS has been clear about the distinction.

When properly structured and administered, SIMERP is as legitimate as your 401(k), as compliant as your FSA, and as defensible as your health insurance plan.
The question isn't whether SIMERP is legal - it demonstrably is.
The question is whether you'll implement it with a reputable provider who ensures ongoing compliance.

Primary Sources: Check This Yourself

Nothing above should be taken on a vendor’s word, including ours. Every authority this analysis rests on is public and free. Hand this list to your own counsel and let them work from the law rather than from an article about it.

• IRC §105 - amounts received under accident and health plans. §105(b) is the exclusion for medical expense reimbursements.
• IRC §106 - employer-provided coverage excluded from employee gross income.
• IRC §125 - cafeteria plans and the pre-tax salary reduction election.
• IRC §213(d) - the definition of medical care that §105(b) points to.
• IRC §3121(a)(2) - the payroll-tax wage exclusion for medical care payments.
• Treasury Regulation §1.105-2 - the “irrespective” test, which is the standard that actually decides these cases.
• Treasury Regulation §1.105-11 - self-insured medical reimbursement plan definition, the written-plan requirement, and the §105(h) nondiscrimination rules.
• Proposed Treasury Regulation §1.125-1(b) - salary reduction amounts treated as employer contributions.
• Proposed Treasury Regulation §1.125-6(b) - substantiation by an independent third party before any claim is paid.
• IRS Publication 15 (Circular E), Section 5 - medical care reimbursements under a self-insured medical reimbursement plan are not wages and are not subject to Social Security, Medicare or FUTA tax.
• IRS Publication 502 - the working list of what qualifies as medical care. See IRS Publication 502: What’s Actually Reimbursable.
• IRS CCA 202323006 (June 2023) - the memorandum most often cited against these programs. Read what it actually addresses: fixed indemnity arrangements paying cash irrespective of medical care.
• IRS CCA 201703013 (January 2017) - the fixed indemnity memorandum, and the one most often waved at these programs. Read the conclusion rather than anyone’s summary of it: payments under a fixed indemnity health plan are not excludable where the value of the coverage was excluded from income, nor where the premiums were paid by §125 salary reduction. We agree with it. It is correctly decided, and what it describes is an arrangement that pays a set sum on a triggering event without regard to any expense the employee incurred. That is a different instrument from a plan that reimburses documented medical care, and the difference is the whole subject of this article.
• Revenue Ruling 2002-3 - rejects circular structures that simply return a salary reduction.

The pattern across every adverse authority in this area is the same. 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

You have three options:

1. Dismiss SIMERP based on incomplete information
2. Continue researching while competitors implement and save
3. Schedule a discovery call with a reputable provider to evaluate your specific situation

Forward-thinking CFOs who've done their due diligence choose option three.

Because the difference between a compliant SIMERP program and a problematic scheme isn't subtle - it's substantial. And once you understand that difference, the decision becomes clear.

Schedule your discovery call today.