Medicare and Employer-Sponsored Plans

Medicare and Employer-Sponsored Plans

Employers concerned about rising healthcare costs often wonder what they can and should do about covering Medicare-eligible employees and their dependents. The relationship between Medicare and employer-sponsored health benefit plans is very complicated, and related compliance mistakes can be very costly for both businesses and employees.  To help eliminate confusion, here is an overview of some of the most common Medicare issues encountered by health benefit plan administrators concerning active employees.  This guide is intended to be a quick reference tool; do not hesitate to contact your Kistler Tiffany Benefits’ Employee Benefits Consultant with any Medicare concerns specific to your plan or your employees.

 Discrimination Protections for Medicare-Eligible Employees

Medicare-eligible employees have specific federal legal protections relative to employer-sponsored health insurance coverage. The Age Discrimination in Employment Act (ADEA) prohibits employers from terminating an employee’s group benefit plan eligibility merely because they become eligible for Medicare at age 65.  Furthermore, the Medicare Secondary Payer Act includes a nondiscrimination clause that protects all active employees and their spouses from being offered coverage options that are less generous than what is offered to younger coworkers in the same employee class.  Employers that violate these laws incur the risk of a lawsuit. Furthermore, violations of the Medicare Secondary Payer Act, which include providing financial incentives to employees or dependent for opting out of employer coverage in favor of Medicare, are punishable by a fine of up to $5000 per affected beneficiary.

Giving Employees Information About Medicare Options

While group benefit discrimination based on a person’s Medicare eligibility status is illegal, employers are still able to give employees information about their expanded coverage options once they approach age 65, and there are many reasons why doing so can benefit both the company and the employee.  Employers cannot make specific recommendations to employees about their Medicare-related coverage, but they can and should make employees aware that turning 65 means new benefit choices are at hand and provide factual information to employees about the coordination of Medicare coverage and group benefits so that employees can make informed and meaningful coverage decisions.  Employers can point employees to resources like and also explain that an independent insurance broker can review all of their coverage options with them, with no direct charge to the employee.

 Medicare Primary and Secondary Payer Rules for Employers

When it comes to coordination of group benefits and employer coverage, different rules apply to employers of different sizes.  Generally, if an employer has more than 20 employees, the group benefit plan is the primary payer for Medicare-eligible individuals, and Medicare is the secondary payer.  For smaller businesses, Medicare is primary, and the employer plan is the secondary source of coverage.

Medicare benefits are divided into main two parts – A and B – with prescription drug coverage being covered through Part D.  Part A covers hospitalization, and there is no cost to the beneficiary for this coverage, so virtually all employees will enroll in it.  Part B covers other medical services, and there is a premium involved, so employees may wish to defer Part B enrollment in favor of their employer-sponsored plan coverage.  However, in small group plans with less than 20 employees, Medicare is the primary payer, so in almost all cases Medicare-eligible employees and dependents must enroll in both Parts A&B.  Otherwise, the employee will be directly responsible for the portions of their claims that would have typically been paid by Medicare.

Deferring Medicare Care Coverage

If an employee of a larger company (where Medicare is the secondary payer of claims) decides to forgo enrolling in Medicare Parts B and D in favor of their employer-sponsored coverage, then they need to notify Medicare that they are deferring their Medicare eligibility.  Employers should make sure employees understand that if they do not obtain this deferral from Medicare, then they will be subject to late enrollment penalties later that will result in higher premiums for life.

Medicare and HIPAA Special Enrollment/Election Changes

Eligibility for Medicare coverage is a permissible coverage election change according to the IRS, which means that an employer may allow an employee to change their Section 125 plan selections mid-year and stop having their group employer plan premiums automatically deducted from their paychecks so that they can enroll in Medicare.  However, this is not an automatic qualifying event, so employers need to specify that Medicare eligibility is a permissible election change in their plan documents.

A related issue concerns HIPAA special enrollment rights.  Loss of other comprehensive coverage automatically qualifying event according to HIPAA, but the loss of Medicare coverage is a little bit tricky.  Medicare coverage through Parts A and B cannot be lost, since the federal government is the provider, so HIPAA special enrollment rules would not apply.  Loss of Medicare supplemental coverage also would not constitute a HIPAA qualifying event.  However, private Medicare coverage, known as Medicare Advantage coverage, can be lost if, for example, a carrier leaves a service area.  While there are no specific federal regulations addressing this situation, it is believed that in such a case, the HIPAA loss of coverage rules could be applied.

HSAs and Medicare

Individuals cannot contribute to a health savings account if they or their spouse are enrolled in Medicare, including Medicare Part A.  There are significant tax penalties involved with violating this rule.  Many Americans are automatically enrolled in Medicare when they apply for Social Security before their 65th birthday.  Employers who offer HSAs as part of their group benefit offerings should make sure that employees who are close to age 65, or who have spouses that are close to age 65, are aware of this rule.  People enrolled in Medicare coverage may continue to draw from unused HSA funds, but they may not contribute any new money to their HSA accounts or start a new one.

Prescription Drug Coverage

Employers that offer prescription drug benefits as part of their group health plan have a responsibility to tell Medicare-eligible plan beneficiaries if their prescription coverage is as good or better than Medicare Part D prescription drug benefits.  They have to notify affected beneficiaries directly before October 15th each year, so that employees can make informed coverage decisions during the annual Medicare open enrollment window.  Companies also need to tell the federal government about their prescription drug coverage offerings by completing an online plan disclosure form through the Centers for Medicare and Medicaid Services each year no later than 60 days from the beginning of a plan year (generally by March 1st for a plan that begins on January 1st).

COBRA Eligibility and Medicare

An individual who is Medicare-eligible may certainly drop their group health insurance coverage to enroll in Medicare.  A Medicare-eligible individual may also be offered COBRA benefits if the person experiences a qualifying event and loses eligibility for a group health plan subject to COBRA.  However, Medicare-eligibility does not alone give an employee COBRA rights because voluntarily dropping your employer-sponsored benefits is not a COBRA qualifying event.

COBRA is not Medicare Creditable Coverage

Medicare-eligible group plan beneficiaries may terminate their group coverage in favor of COBRA if they have a qualifying event.  However, these employees and their dependents should be informed that Medicare will no longer consider this coverage employer coverage, and the employer coverage deferral they may have obtained previously from Medicare will no longer be valid.  These individuals run the risk of incurring lifetime Medicare late enrollment penalties if they do not enroll in Medicare promptly after they lose their group coverage eligibility and become a COBRA beneficiary.

Employer Reporting and Medicare

Applicable large employers subject to health insurance coverage information reporting requirements (reporting via IRS Forms 1094 and 1095 B and/or C), still have to report on offers of coverage to Medicare-eligible employees and dependents.  Employers that offer self-funded benefit plans also must report if any Medicare-eligible individuals are covered by their group benefit plans, even if they also have Medicare coverage in some form.