What Does the IRS Actually Say About SIMERP?

The IRS has never published a document called “SIMERP guidance.” What it has published is the framework the plan runs on: Publication 15 states that self-insured medical reimbursement plan payments are not wages, Treasury Regulation §1.105-2 sets the test a plan must pass, and two Chief Counsel memoranda attack fixed indemnity — a different instrument. Each is quoted here.

If you searched for this page, you probably want the primary sources rather than a vendor’s summary of them. Fair. Every quotation below is verbatim, linked to the document it came from, and shown with enough context to judge it. Read them in this order.

1. What the IRS Says About Payroll Tax

The payroll-tax treatment is not an inference from case law. It is printed in the Employer’s Tax Guide, the document every payroll department in the country administers from:

Generally, medical care reimbursements paid for an employee under an employer’s self-insured medical reimbursement plan aren’t wages and aren’t subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. See Pub. 15-B for a rule regarding inclusion of certain reimbursements in the gross income of highly compensated individuals.

— IRS Publication 15 (Circular E), 2026 edition, Section 5, page 20.

Notice three things. The sentence names the instrument — “self-insured medical reimbursement plan,” the phrase SIMRP abbreviates; SIMERP adds “expense” for the full form, a self-insured medical expense reimbursement plan (see SIMRP or SIMERP?). It begins with “Generally,” which is doing real work: the treatment holds for plans that meet the rules, not for anything wearing the name. And it points at the highly-compensated exception, which is the §105(h) nondiscrimination regime covered at What Is a Section 105 Plan?

2. The Test the IRS Applies

When the IRS evaluates any medical reimbursement arrangement, the standard it reaches for is Treasury Regulation §1.105-2. The operative language:

…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.

This is the “irrespective” test, and it is the hinge of every enforcement action in this category. The question is not whether care was delivered. It is whether the employee would have been paid anyway. A plan that pays a fixed sum for completing an activity fails, because the payment arrives irrespective of any expense. A plan that reimburses documented medical care does not, because without the care and its expense there is nothing to reimburse.

3. What the IRS Attacks: the 2017 Memorandum

Chief Counsel Advice 201703013 (released January 20, 2017) is the document most often waved at these programs. Its subject line is “Tax Treatment of Benefits Paid by Fixed-Indemnity Health Plans,” and its conclusion is:

An employer may not exclude from an employee’s gross income payments under an employer-provided fixed indemnity health plan if the value of the coverage was excluded from the employee’s gross income and wages.

An employer may not exclude from an employee’s gross income payments under an employer-provided fixed indemnity health plan if the premiums for the fixed indemnity health plan were originally made by salary reduction through a § 125 cafeteria plan.

— IRS CCA 201703013, Conclusion.

We agree with it. And it is worth reading past the conclusion, because the memorandum covers more than insurance: its later situations describe §125-funded “wellness plans” paying fixed amounts for completing activities like a health risk assessment — the closest published analog to the schemes that get this category a bad name. Every arrangement it condemns shares one trait: payment without an incurred medical expense. The same memorandum also states the compliant case in its own words:

The value of coverage by an employer-provided wellness program that provides medical care (as defined under § 213(d)) generally is excluded from an employee’s gross income under § 106(a), and any reimbursements or payments for medical care (as defined under § 213(d)) provided by the program is excluded from the employee’s gross income under § 105(b).

— IRS CCA 201703013, Law and Analysis.

That sentence is the line this entire category lives or dies on. Reimbursement of actual §213(d) medical care: excluded. Rewards and incentives that are not payment for medical care: wages.

4. The 2023 Memorandum, Same Line

Chief Counsel Advice 202323006 (released June 9, 2023) revisits the same territory: an employer-funded, insured, fixed-indemnity wellness policy. Its conclusion:

Wellness indemnity payments under an employer-funded, fixed-indemnity insurance policy (including where the premium for the coverage is paid by employee salary reduction through a cafeteria plan under section 125 of the Internal Revenue Code (Code)) are includible in the gross income of the employee if the employee has no unreimbursed medical expenses related to the payment. The exclusion under § 105(b) is limited to amounts paid solely to reimburse expenses incurred for medical care and does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether expenses for medical care are incurred.

— IRS CCA 202323006, Conclusions.

The memorandum’s conclusions describe the policy as paying “$1,000 per month without regard to whether the employee has any unreimbursed health insurance expenses.” Again: payment irrespective of expense. Again the IRS applied §1.105-2, and again we think it applied it correctly. The through-line across both memoranda is a single principle — payment without an incurred medical expense is wages — and that principle is precisely why a compliant reimbursement plan documents the care and reimburses the expense.

5. What the IRS Has Not Said

Honesty requires this section. There is no revenue ruling, no final regulation, and no court decision that names service-based medical reimbursement plans and blesses them, and none that condemns them. The released record — the memoranda above, and published guidance like Revenue Ruling 2002-3 on circular premium-reimbursement schemes — is aimed at arrangements that pay irrespective of incurred expense, whether built as indemnity insurance or as cash-for-activity wellness plans. A careful reader should hold both facts at once: the statutes and regulations these plans run on are decades old and final, and the specific modern design has not been the subject of its own published guidance in either direction.

That is why the right due-diligence posture is not “the IRS approved this” — nobody can honestly say that about any benefits design, since the IRS has no approval program for welfare-plan designs — but “here are the primary sources; have your own counsel read them against the plan documents.” That is the review we invite, and the full analysis is at Is SIMERP Legal? The Definitive Guide to SIMERPs.

The Reading List

• IRS Publication 15 (Circular E), Section 5 — the payroll-tax sentence quoted above.
• Treasury Regulation §1.105-2 — the “irrespective” test.
• Treasury Regulation §1.105-11 — the self-insured medical reimbursement plan regulation: written-plan requirement and nondiscrimination rules.
• IRS CCA 201703013 (January 2017) — fixed indemnity, quoted above.
• IRS CCA 202323006 (June 2023) — fixed indemnity wellness, quoted above.
• IRS CCA 202317020 (April 2023) — substantiation. Self-certification and sampling fail; every claim needs independent third-party verification. Ask any administrator how they meet it.
• Revenue Ruling 2002-3 — published guidance rejecting circular schemes that simply return a salary reduction dressed as premium reimbursement. Real reimbursement of real care is the opposite of what it condemns, and it is the ruling to read next to both memoranda.
• IRC §105, IRC §125, IRC §213(d) — the statutes underneath all of it.

Your Next Step

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