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What to Know About Medicare-Eligible Employees and Your Group Health Plan

Employers are permitted to educate Medicare-eligible employees about the program. However, they should avoid arrangements that incentivize employees to forego company-sponsored health plans in favor of Medicare coverage.

As with many government programs, Medicare can be confusing for non-experts. Below are some common questions and answers for employers with Medicare-eligible employees:

What exactly is Medicare?

Medicare is a federally-funded entitlement program that provides health insurance to senior citizens. All Americans become eligible to sign up for Medicare three months before their 65th birthday, and Americans with certain medical conditions are eligible at even earlier ages.

Medicare coverage includes Part A (Hospital Insurance) and Part B (Medical Insurance). In general, Part A is premium-free and Part B costs $174.70 per month plus high-income earner surcharges. Those eligible for Medicare are not automatically enrolled in the program at age 65 unless they have applied for or are receiving Social Security retirement benefits.

Medicare claims are handled according to a “primary payer” and “secondary payer” system. All claims are initially processed by the primary payer and then sent to the secondary payer for consideration. Medicare is the primary payer if the employer has fewer than 20 employees and for retiree or COBRA coverage for all size employers. The employer group health plan is the primary payer when coverage is due to an employee’s (or spouse’s) current employment status and the employer has 20 or more employees. When Medicare is the primary payer, the group health plan generally requires enrollment in Medicare if eligible employees (and/or their spouses) are age 65 plus. When the group health plan is the primary payer, employers cannot require enrollment in Medicare and are generally required to provide Medicare-entitled employees with the same benefits as individuals under age 65.

Eligible individuals may enroll in Medicare Part C (Medicare Advantage) within two months of losing group health plan coverage. This includes active, retiree, and COBRA coverage. Eligible individuals in these circumstances may also enroll in Medicare Part D (Prescription Drugs) within the same two-month timetable for pharmacy coverage. In such situations, Medicare becomes the primary payer by default.

The Medicare Secondary Payer (MSP) rules expressly prohibit employers from offering any “financial or other incentives” to individuals entitled to Medicare not to enroll (or terminate enrollment) under an employer group health plan that would otherwise be the primary payer.

Are employers allowed to incentivize employees to migrate from a company plan to Medicare coverage?

In a word, no. The Medicare Secondary Payer (MSP) rules expressly prohibit employers from offering any “financial or other incentives” to individuals entitled to Medicare not to enroll (or terminate enrollment) under an employer group health plan that would otherwise be the primary payer. However, it is permissible for employers to provide information and educational resources to employees about this topic.

In some cases, Medicare may be a better fit for eligible employees than their company-provided health insurance. Some employees may not be aware of Medicare or may not be aware that they are eligible for the program, which is when educational resources can make a big difference. Employees who are aware of their options may voluntarily choose to switch to Medicare due to reasons of lower costs or superior coverage. Situations like this can be a win-win, with better health outcomes for employees and reduced costs for employers.

Educating employees about their options can be as simple as providing written materials about Medicare eligibility or having a dedicated Medicare expert speak to employees. These resources can be provided either at open enrollment or on a referral basis to employees as they approach age 65. Ensuring that employees have access to this type of information empowers them to make an informed choice that may also be better for their physical and financial wellbeing. It costs employers nothing to refer employees to a Medicare expert who can act as a source of accurate and unbiased information.

Can employers provide financial support to employees who are enrolled in Medicare and facing increasing Medicare premium costs?

Generally, no, employers cannot support Medicare-eligible employees by assisting them with Medicare premium payments. Such activity would constitute an incentive for company-sponsored plan members to switch to Medicare, violating the MSP rules mentioned above, as well as other laws and regulations.

An exception, however, applies to Individual Coverage Health Reimbursement Arrangements (ICHRAs), which are subject to their own compliance requirements. Another alternative allows for employers with fewer than twenty employees to offer an employer payment plan that reimburses Medicare Part B or Part D premiums if it is “integrated” with a group health plan and meets the following conditions:

  • the employer offers a group health plan (other than the Medicare premium reimbursement arrangement) to the employee that provides minimum value and does not consist solely of excepted benefits;
  • employees participating in the Medicare premium reimbursement arrangement are actually enrolled in Medicare Parts A and B;
  • premium reimbursements under the arrangement are available only to those employees who are enrolled in Medicare Part A and Part B or Part D; and
  • reimbursement under the arrangement is limited to Medicare Part B or Part D premiums and premiums for excepted benefits, including, but not limited to, Medicare supplement policy coverage.

Can employers offer a taxable cash-out option for when some employees are entitled to Medicare?

Yes, so long as the cash-out option is available equally to all employees regardless of Medicare eligibility. An optional cafeteria plan design allows employers to offer a financial incentive to waive the group health due to enrollment in other qualified coverage, including but not limited to Medicare. The Department of Health and Human Services (HHS) representatives have informally indicated that no violation of MSP rules occur when employees entitled to Medicare have the same cash-out rights as employees who are not entitled to Medicare under a bona fide cafeteria plan meeting the requirements of Code §125. However, large employers offering a cash-out option should review how such an arrangement could impact affordability for Affordable Care Act purposes.

Employers should avoid implementing any special arrangement with respect to Medicare-eligible active employees, especially if they employ more than twenty people. The MSP rules prohibit such an arrangement and offering a prohibited incentive can lead to civil penalties of up to $5,000 per violation.

Interested in learning more about how to support Medicare-eligible employees during their transition? Discover how one company successfully supported employees during this process and was able to take back control over rising healthcare costs. Check out the Case Study here: Achieving Stability Through Cost-Savings & Personalized Employee Planning.