Are SIMRP Plans Illegal? Understanding the Truth Behind the Headlines

If you’ve spent any time researching Self-Insured Medical Reimbursement Plans (SIMRPs), you’ve probably seen conflicting opinions. Some claim they are a powerful, tax-efficient strategy. Others go as far as calling them illegal. So what is the truth? The reality is far more nuanced: SIMRP plans are not illegal—but like any tax-advantaged strategy, they must be structured and administered correctly.

Where the Confusion Comes From

Much of the negativity surrounding SIMRPs stems from poorly designed or improperly administered plans that fail to meet federal guidelines. When that happens, regulators don’t view the arrangement as a legitimate health benefit—they view it as taxable compensation disguised as something else. To understand what’s compliant, it helps to understand what is not.

When SIMRP-Type Plans Cross the Line

1. When There Are No Real Medical Expenses. A legitimate reimbursement plan must be tied to actual medical expenses as defined under Internal Revenue Code Section 213(d). If employees receive funds without submitting or incurring eligible expenses, the arrangement may be treated as:

• Taxable income

• Improper wage reclassification

2. When It Functions Like a Payroll Scheme. If a plan:

• Reduces wages on paper

• Then “reimburses” employees in a predictable or automatic way

…it may violate the intent of Internal Revenue Code Section 105 & Internal Revenue Code Section 106. Regulators may then determine the plan lacks economic substance, which is a major compliance issue.

3. When Everyone Gets the Same Payout. Medical reimbursement plans are designed to reimburse actual need, not distribute uniform payments. If every employee receives the same benefit regardless of medical usage it can appear to be disguised compensation, not a health plan.

4. When Proper Documentation Is Missing. A compliant plan requires claims substantiation, documentation & record keeping. Without this, the plan may fail basic IRS requirements and lose its tax-advantaged status.

5. When It Favors Owners or Executives. Plans must comply with nondiscrimination rules underInternal Revenue Code Section 105(h). If a plan disproportionately benefits owners or highly compensated employees it may trigger tax consequences and penalties.

6. When It’s Not Properly Integrated. Certain structures must align with broader healthcare regulations under the Affordable Care Act. Standalone or improperly structured arrangements can lead to compliance issues if they fail to meet integration requirements.

7. When It’s Marketed Incorrectly Some of the strongest criticism of SIMRPs comes from how they are presented, not how they are structured. Red flags include claims like:

• “Guaranteed increase in take-home pay”

• “No cost under any circumstance”

• “IRS-approved program”

Oversimplified or exaggerated messaging can invite scrutiny—even if the underlying structure is sound.

The Reality: Structure Determines Legitimacy

If you’re evaluating a SIMRP structure for your organization, it’s critical to work with professionals who understand both the opportunity and the compliance requirements behind it. No doubt you have come across articles published by Aflac® in 2017 and the IRS Chief Counsel Memorandum 202323006 (the “2023 Memo”) published on June 9, 2023, that educate the public on the incorrect use of a SIMRP. it is important to note these articles and memos are correct in their descriptions of how a SIMRP can and should not be administered. There is always a right and a wrong way to do things. This supports the old expression, "Anything worth doing, is worth doing right."

A properly designed SIMRP-type plan reimburses legitimate medical expenses, follows established tax code provisions, maintains documentation and compliance standards and operates as a true health benefit—not a compensation workaround. When those elements are in place, the plan aligns with long-standing tax and benefits frameworks.

The Bottom Line

The question isn’t whether SIMRP-type plans are legal or illegal. The better question is, “Is the plan being implemented correctly?” Like many financial and tax strategies, the difference between compliant and problematic comes down to design, administration and intent.

The bottom line is this - Plan documents must be made available to the IRS and Department Of Labor. If the SIMRP were noncompliant, the IRS chief council memo would have addressed this in 2017 & 2023 instead of focusing on companies that were offering noncompliant wellness plans filled with indemnity and insurance elements.

Simply put, if the SIMRP is illegal or found noncompliant the IRS and Department of Labor would just reject them. SIMRP Health & Wellness® only works with compliant and ethical providers of SIMRP programs.

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