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.
- Part A covers hospitalization and inpatient care. Most people can enroll in Part A without having to pay any premium.
- 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.
- 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.
- 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:
- 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.
- 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.
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.