At a glance, 401(k) plans and SIMERP (Self-Insured MedicalExpense Reimbursement Plans) can appear to accomplish the same goal: loweringan employee’s “taxable income.” Because both reduce the amount of incomesubject to tax, they are often discussed interchangeably in benefitsconversations.
In reality, these two programs operate under very differentsections of the Internal Revenue Code and produce materially differentpayroll tax outcomes for both employees and employers. Understanding whyrequires separating income tax from employment taxes (FICA) andpaying close attention to how the IRS defines wages.
This distinction is where the real tax impact lies.
Income Tax vs. Payroll Tax: Why the Difference Matters
When most people think about taxes, they think aboutfederal and state income tax. However, payroll taxes—specifically SocialSecurity and Medicare (FICA)—are governed by different rules and apply onlyto amounts classified as wages.
An amount can be excluded from income tax yet still betreated as wages for FICA purposes. Conversely, some benefits are excludedentirely from both income tax and wages. This distinction explains why 401(k)plans and SIMERPs produce very different outcomes, even though both reducetaxable income.
Tax Code Foundations
401(k) Plans
401(k) plans are governed primarily by IRC §401(k),which allows employees to defer a portion of their compensation into aqualified retirement plan. The keyword here is defer. The employee ispostponing receipt of wages until retirement.
While §401(k) governs income tax treatment, the payroll taxtreatment of these deferrals is addressed under IRC §3121(a), whichdefines wages for Social Security and Medicare purposes.
SIMERP Plans
SIMERPs are governed under IRC §105, which addressesemployer-provided medical expense reimbursements. Many SIMERPs are alsostructured within IRC §125 (cafeteria plans), allowing employees toreceive these benefits on a pre-tax basis.
Crucially, these sections of the tax code classify SIMERPreimbursements as employer-provided health benefits, not compensation.That classification drives the favorable payroll tax treatment.
The Definition of “Wages” Is the Key Distinction
401(k) Elective Deferrals
401(k) contributions are considered deferred compensation. Although the employee does not receive the money today, thetax code treats those amounts as wages for payroll tax purposes.
The Internal Revenue Code is explicit:
- Elective deferrals are excluded from current federal income tax
- But they are explicitly included in FICA wages
Congress intentionally structured 401(k) plans this way topreserve the Social Security and Medicare tax base.
Result
- Employees still pay Social Security and Medicare tax on their 401(k) contributions
- Employers still pay the matching employer-side FICA
- There are no payroll tax savingsl, only income tax deferrals
SIMERP Contributions
SIMERP reimbursements are fundamentally different. They areclassified as employer-provided medical benefits, not wages or deferredcompensation.
Under IRC §3121(a)(2), qualified employer medicalreimbursements are excluded from:
- Gross income
- Wages
- FICA
- FUTA
Because these amounts are not considered wages, payrolltaxes never apply.
Result
- Employees avoid both income tax and FICA
- Employers avoid employer-side FICA
- True payroll tax savings are created for both parties
Payroll Tax Comparison at a Glance
This table highlights the core difference: 401(k)contributions are deferred wages, while SIMERP reimbursements are excluded benefits.
Policy Intent: Why the Difference Is Deliberate
These different outcomes are not loopholes or unintendedconsequences. They reflect deliberate policy decisions by Congress.
- 401(k) plans were designed to encourage retirement savings without eroding the Social Security tax base. As a result, payroll taxes still apply.
- SIMERP plans were designed to encourage employers to provide healthcare benefits by removing payroll tax friction entirely.
Each program solves a different policy problem, and the taxtreatment aligns with that intent.
Conclusion
While both 401(k) plans and SIMERPs reduce an employee’s“taxable income,” they do not reduce taxes in the same way. A 401(k) reducesincome tax today but leaves payroll taxes untouched. A SIMERP, by contrast,reduces both income tax and payroll taxes because it removes amountsfrom taxable wages altogether.
Since FICA applies strictly to wages, only SIMERP createspayroll tax savings for both employees and employers. Understanding thisdistinction is critical for advisors, employers, and business owners evaluatingbenefit strategies that go beyond simple income tax deferral.