Self-Insured Medical Expense Reimbursement Plans (SIMERPs) have become increasingly popular, especially among promoters who advertise them as a way for employers and employees to “save $639 per year per employee” or “No Cost to the Employee plus better benefits”.
IRC § 105(b), IRC § 213(d), IRC § 106(a) define and regulate SIMERPs; the IRS has released multiple rulings which relate to the compliance of these plans.

While legitimate SIMERP structures do exist, a growing number of promoters are selling non-compliant, high-risk versions of these programs—sometimes knowingly, sometimes out of ignorance. The danger is that one bad promoter can wreck the financial lives of both employees and employers if the IRS ever audits the arrangement.

This post explains the biggest compliance issues, why some sales claims are fraudulent, and how to spot the red flags before it’s too late.

1. The “One Annual Activity = Full Reimbursement” Myth

Some promoters market SIMERPs using a dangerously oversimplified claim:

“Employees can deduct a fixed amount pre-tax every month, and as long as they complete one wellness activity per year, they’re eligible to be reimbursed the full amount they deducted.”

This is not supported by IRS regulations, the Internal Revenue Code, or the ACA’s wellness rules. In fact, it is expressly defined otherwise in both Rev. Rul. 2005-24 and in IRS Section 1.105-2 “Amounts Expended for medical care”.

“Section 1.105-2 of the regulations provides that only amounts that are paid specifically to reimburse the taxpayer for expenses incurred by the taxpayer for the prescribed medical care are excludable from gross income. Section 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of whether or not the taxpayer incurs expenses for medical care.”

Here’s why:

A. Pre-tax deductions must be tied to real, substantiated medical expenses

Under Internal Revenue Code §105 and §213, employees can only receive tax-free reimbursements for actual, eligible medical expenses that are incurred and substantiated.
There is no legal mechanism that turns a single annual “activity” (e.g., a telehealth visit, coaching call, or risk assessment/diagnostic) into a license to reimburse thousands of dollars of unrelated pretax deductions. If this is how a SIMERP provider is telling you how it works….RUN FOR THE HILLS. They are either grossly misinformed or they are committing fraud.

B. A wellness “activity” is not a medical claim

The ACA’s wellness program rules (PHSA §2705) simply require that if a plan offers a health-contingent wellness reward, employees must be given the opportunity to qualify once per year. This is unrelated to Section 105(b). Again, there is NO legal basis for the “one activity per year” selling point. This is often simply a requirement of the wellness program provider to be able to show some activity for that employee on which to base their full reimbursement.

This does not:

  • Authorize pre-tax reimbursements,
  • Create medical expenses where none exist,
  • Convert non-medical incentives into tax-free benefits, or
  • Replace substantiation requirements under IRS §105 and §125.

Promoters who claim otherwise are either deeply misinformed or intentionally deceptive.

C. The IRS has already cracked down on related schemes

The IRS has repeatedly warned about:

  • “wellness conversion” arrangements
  • disguised wage programs
  • non-substantive wellness plans
  • fixed-indemnity plans marketed as tax shelters

These warnings should signal to employers that the agency is watching for exactly these patterns.

2. Why These Arrangements Are Dangerous

Promoters often emphasize the supposed “tax savings for employers and no cost increased benefits for employees” and avoid discussing the catastrophic downside. 
Here’s what is really at stake:

A. Employees may owe years of back taxes, penalties, and interest

If reimbursements were improperly excluded from wages, the IRS can:

  • Reclassify reimbursements as taxable income
  • Assess penalties for under-withholding
  • Charge interest on unpaid amounts
  • Disallow deductions entirely

For a family living paycheck to paycheck, this is financially devastating.

B. Employers may face steep payroll tax liabilities

Employers can be held responsible for:

  • Employer-side FICA tax
  • Penalties for failure to withhold
  • Potential accuracy-related penalties
  • Improper administration of a Section 125 plan

If the IRS concludes the plan is abusive or not a bona fide medical reimbursement plan, the entire structure collapses.

C. Plans may violate ERISA, HIPAA, and ACA market reform rules

Non-compliant SIMERPs may:

  • Violate ERISA reporting and fiduciary standards
  • Fail to comply with HIPAA privacy and security requirements
  • Run afoul of ACA preventive care and mandate rules
  • Be considered “employer payment plans,” which the IRS banned in 2013

The implications of violating these laws, willingly or otherwise, are extremely punitive and can lead to massive financial repercussions.

D. Insurance carriers and TPAs may be unaware of the unlawful structure

Some promoters quietly bolt “SIMERPs” onto unrelated health or wellness services without telling carriers or administrators what the plan is being used for.
This puts everyone in the chain at risk.

3. Red Flags That a SIMERP Is Not Compliant

Employers should be extremely cautious if they hear any of the following:

“All employees need to do is one wellness activity per year.” – False. No statute turns an annual check-in into a magic tax shelter.

“The monthly reimbursement is equal to the monthly pre-tax deduction.” – This indicates that the promoter does not substantiate actual incurred medical expenses.

“Even if employees don’t have medical expenses, they get reimbursed.” – That is literally an abusive arrangement.

If a promoter says these things, walk away immediately.

4. How Employers Can Protect Themselves and Their Employees

Demand the actual plan document(s)
A legitimate SIMERP must be based on a real Section 105 plan with clear definitions of reimbursable expenses.

Ask how substantiation is handled and demand to see examples
If the reimbursement is not tied to qualified and documented medical care expenses, it’s non-compliant.

Request written legal opinions—not marketing summaries
A promoter unwilling to provide them is a promoter you should avoid.

Verify that the arrangement has no fixed-indemnity or disguised wage features

Have a benefits attorney review the structure before enrollment
This is the single most important step.

5. The Bottom Line

A properly designed SIMERP can be a legitimate tax-advantaged benefit. But the versions being aggressively marketed today—especially those built around the “one annual activity” loophole that doesn’t exist—are walking employers and employees straight into a potential IRS nightmare.

Promoters who knowingly push these schemes are not just bending rules, they are putting real people at risk of audits, back taxes, penalties, and financial ruin.

Employers should approach all SIMERP arrangements with extreme caution and insist on full legal compliance before implementing anything that touches payroll taxes.