Medicare and Group Health Plans

Transitioning to Medicare from a group health plan

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More employees than ever before are working beyond age 65, and this is the age when most people in America quality for Medicare. Employers and plan administrators need to understand their options and/or requirements when an employee is eligible for both a group health plan and Medicare. Before we get to that, let's start with some basics.

The Medicare Alphabet

Medicare is comprised of four different parts, each of which is identified by a letter.

  1. Part A covers hospitalization and inpatient care. Most people can enroll in Part A without having to pay any premium.
  2. Part B covers office visits and outpatient care. Most people must pay a premium to enroll in Part B. In 2021, the premium starts at $148.50/month and increases for higher income earners.

    Parts A and B are referred to as Original Medicare, and the benefits are administered by the Centers for Medicare and Medicaid Services (CMS), a federal government agency.

  3. Part C is more commonly called the Medicare Advantage program. Under the Medicare Advantage program, private insurance companies administer Part A and B benefits, and often provide more benefits than Original Medicare. There may be an additional premium charged by the private insurance company, although some plans have no additional premium.
  4. Part D covers prescription drugs. Part D plans are also administered by private insurance companies. In addition, several Medicare Advantage plans include Part D coverage.

Although technically not a “part” of Medicare, there is one other plan to point out. Medicare Supplement plans, also known as Medigap plans, are available to people enrolled in Original Medicare. These plans cover some of the deductibles and out-of-pocket costs associated with Parts A and B.

Qualifying for Medicare

Most people qualify for Medicare on the first day of the month that they turn age 65. For example, if your birthday was on May 15th, your eligibility for Medicare will start on May 1st.

Some people qualify for Medicare under age 65 because of a disability. These people are eligible for Medicare on the first day of the 25th month of receiving Social Security Disability Income benefits. People under age 65 with end-stage renal disease (ESRD) or amyotropic lateral sclerosis (ALS) can qualify for Medicare earlier.

 

Coordination of Benefits

Employers and plan administrators should be prepared to answer questions from employees as they enroll or consider enrolling in Medicare while still working or having coverage through a spouse who is still working. The federal government has a set of rules in place, referred to as Medicare Secondary Payer rules (MSP rules), that determines which health plan is primary and secondary when an employee is enrolled in both a group health plan and Medicare. This is primarily based on the size of the employer, and when determining the size, employers should include full-time and part-time employees in the count.

  • Employers with fewer than 20 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.
    • Medicare will be the primary payer of coverage. The group health plan will be the secondary payer of coverage.
  • Employers with 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.
    • The group health plan will be the primary coverage for those people who qualify for Medicare based on turning age 65. Medicare will be the secondary payer of coverage.
  • Employers with 100 or more full-time and/or part-time employees on 50 percent or more of its business days during the previous calendar year.
    • The group health plan will be the primary coverage for those people who qualify for Medicare due to a disability. Medicare will be the secondary payer of coverage. Note: Special rules apply to individuals who qualify for Medicare based on a diagnosis of ESRD.
  • Employers offering coverage to former employees, such as retirees.
    • Medicare will be the primary payer of coverage regardless of the employer’s size. The group health plan will be the secondary payer of coverage.

 

Options for Employers and Plan Administrators

Some employers or plan administrators may be interested in providing an alternative benefit to employees who are eligible for Medicare. This alternative benefit generally involves a financial incentive to disenroll in the group health plan and pursue coverage exclusively through Medicare. This could create savings to the employer, coverage under Medicare may be better than the group health plan, or it could be a combination of both.

The MSP rules that were discussed above also dictate when a financial incentive which may encourage disenrollment from the group health plan can be offered. These MSP rules are in place to protect the solvency of the Medicare Program.

  • When Medicare would be the primary coverage regardless of enrollment in the group health plan (usually, this will be employers with fewer than 20 employees), the employer may establish a Health Reimbursement Arrangement (HRA) which provides tax-free reimbursements to employees under the following circumstances:
    • The employee is offered a group major medical plan with minimum value; and
    • The employee is actually enrolled in Medicare Parts A & B; and
    • Premium reimbursements are only available to those employees enrolled in Parts A, B and/or D; and
    • Reimbursements are limited to Part B and D premiums, Medicare Supplement premiums, and excepted benefits (e.g. dental/vision). 
  • When Medicare would be the secondary payer of coverage if the employee were enrolled in both the group health plan and Medicare, the employer cannot offer any incentive (financial, or otherwise) that would encourage disenrollment from the group health plan. Penalties of up to $5,000 for each violation may apply.  In addition, the Internal Revenue Service (IRS) may impose a penalty of up to 25% of the employer’s group health plan expenses for the relevant year.  It would not be advisable to pay or reimburse employees for Medicare premiums (with pre-tax or after-tax dollars) in situations where Medicare would be the secondary payer of coverage if the employee enrolled in the group health plan.     
  • Employers offering retiree coverage may establish an HRA that reimburses Medicare premiums and/or medical expenses without having to offer a traditional group health plan. These HRAs allow employers to fix their contributions and expenses while at the same time providing a generous benefit to retirees.

 

Medicare and COBRA

Medicare entitlement of the employee is listed as a COBRA qualifying event, however, it is rarely a qualifying event. In situations where it is a qualifying event, it is only a qualifying event for the spouse or children that are covered under the group health plan.

For Medicare entitlement of the employee to be a qualifying event, the terms of the group health plan must specify that the employee is no longer eligible for coverage under the group health plan once entitled to Medicare. This is prohibited in most instances by the MSP rules, and thus, Medicare entitlement of the employee is rarely a COBRA qualifying event. This is best illustrated by an example.

John works for XYZ Company which has 200 employees and is subject to COBRA and the MSP rules. John is enrolled in the group health plan offered by XYZ Company, and he also has elected to cover his spouse Jill under the plan. John just turned age 65 and has become eligible for Medicare, but Jill is only 62 years old and is not yet eligible for Medicare. John has decided to enroll in Medicare, and consequently, Jill will be losing coverage under the group health plan.

Does XYZ Company have to offer COBRA to Jill? No.

John voluntarily dropped coverage under the group health plan. XYZ Company did not, and is prohibited from, changing John’s eligibility for coverage under the group health plan because he enrolled in Medicare. John could have continued coverage under the group health plan even while enrolled in Medicare. As a result, John’s Medicare entitlement does not trigger a COBRA qualifying event for Jill.

Medicare Part D Notification and Reporting

 

As previously mentioned, Part D is the prescription drug program available to those individuals who are enrolled in Medicare Parts A and/or B.  Upon becoming eligible for Medicare, each person has the option to sign up for a Part D plan.  If a person delays enrollment in Part D, they will be charged a late enrollment penalty equal to 1% of the “national base beneficiary premium” multiplied by the number of months not enrolled in a Part D plan.  However, if a person delays enrollment in Part D and is enrolled in a plan from their employer which includes prescription drug coverage, they will most likely have that penalty waived if they sign up for Part D later. 

 

The Medicare rules provide that employers or plan administrators must do two things:

  1. Provide any Medicare eligible individuals with a notice annually prior to October 15th.  The notice indicates whether the drug coverage you offer is at least as good as the standard Part D plan option, referred to as the creditable coverage notice.  There is a non-creditable coverage notice if the drug coverage isn’t at least as good as the standard Part D plan option.  The notice should also be provided at other times, such as when a person first joins the plan or if creditable coverage status changes.  The best practice is to give this notice to all eligible employees since you may not be aware if they and/or their dependents are eligible for Medicare.
  2. You must report information about your drug coverage and its creditable or non-creditable status to CMS within 60 days of the start of each plan year.  You must also report to CMS within 30 days after termination of a plan with prescription drug coverage or a change in the plan’s creditable coverage status. 

Model notices and access to the online site to complete the reporting can be found HERE.

Summary

Employers and plan administrators should educate themselves about the interaction between Medicare and group health plans. It’s important for compliance reasons, but it’s also important to help employees understand what does (or doesn’t) change upon becoming eligible or enrolled in Medicare.

Talk to us at (855)-563-6993

Questions? Contact a licensed agent

Employee FAQ

The following is a list of frequently asked questions (FAQ) for employees who are becoming eligible for Medicare and are currently covered by a group health plan.

1. Can I stay on the group health plan?

In most scenarios, the employer must give you the option to stay on the group health plan.

2. Can I drop coverage under the group health plan and enroll in Medicare?

Yes.

3. What are the different parts of Medicare and what do they cover?

Part A covers hospitalizations and inpatient care.
Part B covers office visits and outpatient care.
Part C combines Part A and B benefits into a single plan administered by private insurance companies. This is referred to as the Medicare Advantage plan.
Part D covers prescription drugs, and many Part C plans also include Part D coverage.
There are also Medicare Supplement plans, sometimes called Medigap plans, which are available to people covered under Parts A and B. These plans cover some of the deductible and out-of-pocket expenses associated with Medicare.

4. Can I be enrolled in a group health plan and Medicare at the same time?

Yes.

5. Which plan is my primary coverage if I’m covered by a group health plan and Medicare at the same time?

Usually, if the employer has fewer than 20 employees, Medicare will be your primary insurance coverage. Likewise, if the employer has 20 or more employees, the group health plan will usually be your primary insurance coverage. Check with the employer to be certain.

6. How much does Medicare Part A and B cost?

Most people don’t have to pay any premium for Medicare Part A. Most people must pay a premium for Medicare Part B. The exact premium depends on your income and varies from one year to the next. Check www.medicare.gov for a list of the current premiums.

7. What else should I know when Medicare would be the primary coverage?

Generally, you’ll need to sign up for both Medicare Part A and B even if you continue the group health plan. The group health plan usually won’t pay for what Medicare would otherwise cover.

8. What else should I know when Medicare would be the secondary coverage?

Most people choose to delay enrollment in Part B due to the premium. However, you may want to consider enrolling in Part A since there is usually no premium.

9. Does Medicare impact my ability to contribute to an HSA?

Yes. Enrolling in either Part A or B will eliminate your ability to contribute to an HSA.

10. Is there a late enrollment penalty if I delay signing up for Part A or B?

Not if you delay enrollment because you are covered by a group health plan based on your current employment or your spouse’s employment. However, once employment is terminated, you must sign up for coverage within 8 months even if you elect COBRA. Failure to sign up for Medicare Part A and/or B during this time could limit when you can enroll and/or result in a penalty.

11. When can I sign up for a Medicare Supplement plan?

Your acceptance is guaranteed with every insurance company within 6 months of enrolling in Part B. Even if you’ve been enrolled in Part B for more than 6 months, most plan options will be available to you at a later date provided you delayed enrollment in a Medicare Supplement plan because you were covered by a group health plan. You’ll need to act quickly after losing coverage under the group health plan. You’ll have 63 days to sign up.

12. When can I sign up for a Part C or D plan?

You’ll have a 7-month initial enrollment period that starts 3 months before you’re eligible for Medicare, includes the month of Medicare eligibility, and concludes 3 months thereafter. If you delay enrollment in either plan because you were covered by a group health plan, you’ll have at least 60 days to sign up for either plan after you lose the group health plan.
Please be aware that if you delay enrollment in Part D you could be charged a late enrollment penalty unless you have creditable prescription drug coverage elsewhere. The employer is supposed to provide you with a notice prior to October 15th of each year which indicates if the drug coverage on the group health plan is creditable. The term creditable means the prescription drug coverage on the group health plan is at least as good as the standard Part D plan. Most group health plans provide creditable prescription drug coverage.

Talk to us at (855)-563-6993

Questions? Contact a licensed agent