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Where did SIMERP come from? A dated history, 1954 to 2026

By Kristin MoorePublished SIMERP

SIMERP is a tax structure first and a care program second, and its history runs in two lanes. The tax lane starts in 1954 and hasn’t changed in the ways that matter, though not for lack of trying. The delivery lane, the part that made the plan something a 40-person company can run, is only a few years old.

What did the 1954 Code put in place?

The Internal Revenue Code of 1954 created the sections every plan in this category runs on: Section 106, which keeps employer-provided health coverage out of an employee’s income; Section 105(b), which keeps reimbursements for medical care out of income; and Section 213(d), which defines medical care. The regulation under 105(b) added the sentence that decides the category.

In the Code’s words: Section 106(a) says gross income “does not include employer-provided coverage under an accident or health plan.” Section 105(b) keeps out of income amounts paid “to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care” of the employee, a spouse or a dependent. Section 213(d) says medical care means amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease.”

On the record
“Section 105(b) does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether or not he incurs expenses for medical care.”
Treasury Regulation §1.105-2, read September 11, 2026

Everything the IRS has said about this category since is an application of that sentence. Which plans pass it and which fail it is on the two plans that arrive with SIMERP on the proposal.

What did 1978 add?

The Revenue Act of 1978, signed November 6, 1978, added Section 125, the cafeteria plan that lets an employee take part of their pay as a non-taxable benefit, and Section 105(h), which says a self-insured plan can’t favor highly paid employees. The same act created Section 401(k). Treasury’s regulation under 105(h), finalized January 15, 1981, gave the category its name.

On the record
“A self-insured medical reimbursement plan is a separate written plan for the benefit of employees which provides for reimbursement of employee medical expenses referred to in section 105(b).”
Treasury Regulation §1.105-11, T.D. 7754, January 15, 1981

The IRS still uses that phrase, self-insured medical reimbursement plan, in Publication 15, its employer’s tax guide. We added the E, for expense.

When did the IRS first say no to the double dip?

January 22, 2002, in Revenue Ruling 2002-3. An employer let employees pay their health premiums before tax under a Section 125 plan, then paid them back for those same premiums and called the payback tax-free. The IRS said the paybacks were wages. An employee can’t be reimbursed tax-free for money that was never taxed in the first place.

On the record
“The exclusions from gross income under §§106(a) and 105(b) do not apply to amounts that an employer pays to employees to reimburse the employees for amounts paid by an employer for health insurance coverage that are excluded from gross income under §106(a) (including salary reduction amounts pursuant to a cafeteria plan under §125 that are applied to pay for such coverage).”
Revenue Ruling 2002-3, Internal Revenue Bulletin 2002-3, January 22, 2002

Every later memo builds on that ruling. A reimbursement under Section 105(b) is for a medical care expense the employee incurred, and a payback of an excluded premium is not that.

What happened in 2013?

On June 3, 2013, three federal departments published the Affordable Care Act’s rule on workplace wellness programs. It set how large a reward an employer may tie to a health goal through its group health plan, and it said well-designed wellness programs help. It doesn’t govern a Section 105 reimbursement plan, but the industry dates itself from it.

On the record
“The Departments believe that appropriately designed wellness programs have the potential to contribute importantly to promoting health and preventing disease.”
Incentives for Nondiscriminatory Wellness Programs in Group Health Plans, final rule, 78 FR 33158, June 3, 2013

In our experience, this is the year people in the industry point to when they say the plan has been around for more than a decade. The pieces existed. What didn’t exist yet was a way for a small employer to deliver real medical care to every employee without a clinic.

What did the IRS memos of 2016, 2017 and 2023 say?

Each memo looked at a fixed cash payment with no medical expense behind it, and each said the payment was wages: cash rewards for a wellness program in 2016, and payments from fixed-indemnity insurance policies bought with pre-tax pay in 2017 and 2023. The memos describe the indemnity plan, and the Code says they can’t be cited as precedent.

CCA 201622031 (April 14, 2016): “An employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.” CCA 201703013 (December 12, 2016) defined a fixed indemnity plan as one that “pays covered individuals a specified amount of cash for the occurrence of certain health-related events” where “the amount paid is not related to the amount of any medical expense incurred.” CCA 202323006 (May 9, 2023) applied the same §1.105-2 sentence to a fixed-indemnity policy bought with pre-tax pay that paid a set amount each month for wellness activities.

On the record
“Unless the Secretary otherwise establishes by regulations, a written determination may not be used or cited as precedent.”
26 U.S.C. §6110(k)(3), read September 11, 2026

The memos tell you how the IRS reads the law for the facts in front of it, and for the facts they describe the reading has been consistent since 2002. The full quotations, and what each plan looks like on a proposal, are on the two-plans page.

What did Treasury ask for, and what came of it?

Treasury asked for the same change three ways between 2022 and 2024: twice in its Green Book, the annual wish list of tax changes it sends Congress, and once as a proposed regulation. It wanted fixed-indemnity cash taxed no matter what the care actually cost. Congress never acted, the regulation was never finalized, and no Green Book has followed.

The FY2023 Green Book (March 2022, pages 104 and 105) and the FY2024 Green Book (March 9, 2023, pages 204 and 205) both carried a proposal titled “Clarify tax treatment of fixed indemnity health policies.” Treasury called it a clarification: its Current Law section says amounts exceeding an employee’s medical expenses are already income under longstanding guidance. The proposal:

On the record
“Any fixed payment (in the form of a direct payment, reimbursement, loan, or advance reimbursement) to an employee under a fixed indemnity arrangement that is paid without regard to the actual cost of the medical expenses the employee incurred would not be excluded from gross income and would be treated as wages subject to FICA and FUTA taxes.”
Treasury, General Explanations of the Administration’s FY2024 Revenue Proposals, March 9, 2023, pages 204 and 205; the same proposal appears in the FY2023 edition, March 2022, pages 104 and 105

Congress never took it up. We searched for a bill that would have made it law and found none, which is a search result, not proof. Treasury then tried the other route: on July 12, 2023 it proposed writing the same position into the regulation itself (REG-120730-21). When the final rule came out on April 3, 2024, that part wasn’t in it.

On the record
“Accordingly, to provide more time to study the issues and concerns raised by commenters, the Treasury Department and the IRS are not finalizing the proposed amendments to 26 CFR 1.105–2 at this time.”
Short-Term, Limited-Duration Insurance and Independent, Noncoordinated Excepted Benefits Coverage, final rule, 89 FR 23338, April 3, 2024

The same preamble says nobody should read anything into that decision, that the IRS will keep enforcing the existing rule, and that more guidance is coming. So the regulation reads as it did before 2023, and the proposal is deferred rather than withdrawn. The next Green Book, for FY2025, released March 11, 2024, didn’t mention it, and no Green Book has been published since; the law firm Miller & Chevalier reported that the current administration doesn’t issue one.

What did the IRS warn about in 2024?

On March 6, 2024, the IRS warned that companies were misrepresenting nutrition, wellness and general health expenses as medical care for health spending accounts. The alert is about FSAs, HSAs and HRAs, not employer reimbursement plans, but it says what the regulation says: general wellness isn’t medical care, and care from a physician is.

On the record
“Personal expenses for general health and wellness are not considered medical expenses under the tax law.”
IRS alert IR-2024-65, March 6, 2024

What changed in how the plan is delivered?

The tax treatment of an employer paying for an employee’s medical care is as old as the company clinic, and the Code has never cared whether the doctor was down the hall or on a screen. What changed is that virtual medical care grew up, and a 40-person company could offer real care to every employee and their family.

That timing explains the category’s reputation. Fixed-indemnity wellness plans arrived before the care did, so they used policies and activities instead, and the warnings written about them are what a search engine still finds.

Where does that leave the law today?

Where it was. The exclusion for reimbursed medical care, the definition of medical care, and the irrespective sentence in the regulation read as they did when they were written. Congress has changed other parts of those sections, not these. Since 2002 the IRS has read them the same way every time: fixed cash paid whether or not there was a medical expense is wages.

A reimbursement for medical care is not, and that has been the statute since 1954.

Where your plan sits between those two is the only question that matters, and ten questions will tell you.

References

Questions this page answers

Has Congress changed the law on SIMERP plans?

Not on this question. The exclusion for reimbursed medical care in Section 105(b) and the definition of medical care in Section 213(d) read as they did in 1954; Congress has changed those sections in other ways, such as adding adult children and long-term care. The Treasury Department asked Congress twice, in its FY2023 and FY2024 Green Books, to tax fixed-indemnity cash payments no matter what the actual medical costs were, and called it a clarification of existing law. Congress never acted, and no Green Book has been published since FY2025.

Did the IRS finalize a rule against wellness reimbursement plans?

Not yet. A July 2023 proposed rule would have written the memos' position into Treasury Regulation 1.105-2. When the final rule came out on April 3, 2024, that part wasn't in it. Treasury and the IRS said they wanted more time to study the concerns people had raised, that nobody should read anything into the decision, that the IRS would keep enforcing the existing rule, and that more guidance is coming.

Disclaimer: This article is provided for educational purposes only and does not constitute legal or tax advice. SIMERP LLC is not a law firm or accounting firm. The information presented here reflects our understanding of relevant tax codes and regulations based on research and experience helping businesses implement SIMERP programs. Every business situation is unique, and tax laws can be complex. You should consult with your own qualified tax and legal advisors to determine if SIMERP is appropriate for your specific circumstances.

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