I have a client prospect who wants to put in a $2000 deductible PPO plan. They plan to reimburse each employee up to $1500 of this deductible through regular business reimbursement procedures. No plan document, no TPA.

This doesn't sound good to me....

1. What are the ramifications?
2. Is this reimbursement considered taxable income to the employees?
3. Can the employer deduct these dollars as an eligible business expense?

This is a welfare benefit plan subject to ERISA. As such it requires a plan document and an SPD.
This is an HRA, subject to the limitations and rules published by IRS in the RR and Notice relative to HRAs, and a couple of subsequent clarifications.
The plan may require a form 5500, although as an unfunded plan it will be a simple filing.
As you describe the arrangement, employer contributions are still tax-deductible. However, without complying with the HRA rules, the amounts reimbursed will be taxable to the employees and will need to be reported on form W-2.

Why does it have to be an HRA? There was no mention of a rollover, only reimbursement up to the deductible, which would mean up to submitted claims not exceeding $1500.

IF the employer is large enough to have its group health plans be subject to COBRA, I have a problem with stand-alone HRAs. How do you determine the premium for COBRA purposes? I don't think you can simply say the premium is the maximum amount reimburseable; I think the premium would be some lesser amount that only a competent actuary can determine, and what employer wants to all of a sudden be in the health insurance business?

My understanding is that many HRAs and PPOs, HMOs, etc., are offered in tandem, and the HRA is actually administered by the same carrier. If there is a COBRA event, the employee must purchase either both products or neither, and the issue of pricing falls on the shoulders of the carrier.

GBurns: You are correct in that a Section 105(h) MERP may not be an HRA. Without the rollover feature, the plan still has to comply with Regs 1.105-11, and with ERISA.
benefitsnerd: I neglected to point out that insurance laws of some states do NOT exempt self-funded health plans of a single-employer or of a controlled group. (However, most do.)

1. Adjudication cost added onto FSA

2. Yes

3. Subject to payroll taxes

Re 2: Why would reimbursement of substantiated medical expenses be taxable income?

Re 3: What does the deduction of business expenses by an employer, a section 162 action, have to do with payroll taxes?