Can Employers Pay Employees’ Medicare Premiums? Well, it Depends.
Employers that sponsor group health plans and have employees who are Medicare-eligible may be interested in reimbursing their employees’ Medicare premiums. In general, when an employee is eligible for Medicare due to age, an employer may reimburse his or her Medicare premiums only when:
- The employer’s group health plan is a secondary payer to Medicare because the employer has fewer than 20 employees; AND
- The reimbursement arrangement complies with the Affordable Care Act (ACA) because it satisfies certain design requirements (or covers fewer than two employees).
Although technically employers with 20+ employees may offer an individual coverage health reimbursement arrangement (ICHRA) to reimburse their eligible employees for insurance policies purchased in the individual market, including Medicare premiums, as an alternative to traditional group health plan coverage,
ICHRA rules make that option impractical if the specific goal is to reimburse Medicare premiums. For example, subject to certain conditions, the final rules for ICHRAs do NOT allow employers to create a separate class for employees who are eligible for or enrolled in Medicare.
General Rules
Group health plan sponsors with 20 or more employees risk violating the MSP rules if they pay employees’ Medicare premiums.
Group health plan sponsors with fewer than 20 employees may be able to pay employees’ Medicare premiums if the ACA’s integration rules are satisfied.
Employers may use an ICHRA to reimburse eligible employee’s Medicare premiums, subject to certain conditions. However, ICHRAs do NOT allow employers to create separate classes for employees who are eligible for or enrolled in Medicare. If the goal is to reimburse (exclusively) employee Medicare premiums, an ICHRA is not an option.
Medicare Secondary Payer Rules
The Medicare Secondary Payer (MSP) rules are designed to shift costs from the Medicare program to private sources of payment (such as employer-sponsored group health plans) in certain situations. The MSP provisions govern the coordination of benefits rules for determining when an employer-sponsored group health plan will pay primary or secondary to Medicare.
The MSP provisions vary based on a number of factors, including the source of the other health coverage and why an individual is entitled to Medicare (for example, age, disability or end-stage renal disease). This discussion focuses on the MSP rules for employer-sponsored group health coverage for employees (or their spouses) who are entitled to Medicare due to age.
Primary Payer Status
Medicare pays secondary to an employer-sponsored group health plan for individuals age 65 or older who have group health plan coverage as a result of:
- Their own current employment status with an employer with 20 or more employees; or
- The current employment status of a spouse of any age with an employer with 20 or more employees.
The 20-employee threshold is met if an employer has 20 or more full-time and/or part-time employees for each working day in each of 20 or more calendar weeks in the current or preceding year. Aggregation rules apply for companies that have common ownership.
| Situation | Size | Pays 1st | Pays 2nd |
| Individuals age 65 or older who are covered by a group health plan because they (or their spouses) are still working. | 20 + employees | Group health plan | Medicare |
| < 20 employees | Medicare | Group health plan |
Restrictions
Due to their primary payer status, employers with 20 or more employees that sponsor group health plans must comply with the following requirements:
- The group health plan must provide a current employee (or a current employee’s spouse) who is age 65 or older with the same benefits, under the same conditions, that are provided to employees and spouses who are under age 65;
- The group health plan cannot take into account the Medicare entitlement of a current employee (or a current employee’s spouse); and
- The employer cannot offer any financial or other incentive for a Medicare-entitled individual not to enroll (or to terminate enrollment) under a group health plan which would be a primary plan if the individual were enrolled.
Small employers (fewer than 20 employees) are not subject to these restrictions because Medicare has primary payer status.
Cannot Offer Incentives
Medicare beneficiaries are free to reject employer plan coverage, in which case they retain Medicare as their primary coverage. However, when Medicare is the secondary payer, employers cannot discourage employees from enrolling in their group health plans.
Also, employers cannot offer any “financial or other incentive” for an individual entitled to Medicare “not to enroll (or terminate enrollment) under” a group health plan that would pay primary. A violation of the prohibition on offering incentives can trigger financial penalties of up to $10,360 per violation.
CMS has advised that an employer cannot offer, subsidize or be involved in the arrangement of a Medicare supplement policy where the law makes Medicare the secondary payer. Because this type of arrangement takes into account the Medicare entitlement of the employee, CMS has warned that it would subject the employer to possible excise taxes under the Internal Revenue Code.
Links & Resources
- MSP Rules: Centers for Medicare & Medicaid Services (CMS) website, including the Medicare Secondary Payer Manual
- ACA Restrictions on Employer Payment Plans: IRS Notice 2015-17
- Individual coverage HRAs: Final rules issued by the Departments of Labor, Health and Human Services and the Treasury
- IRS webpage: Employer Health Care Arrangements
