MSP Requirements: Offering Incentives

Employers often wonder if they can pay or reimburse employees for Medicare premiums if they waive coverage under the employer-sponsored group health plan. This may drive down the overall cost to the employer, and it may even be in the best interest of some Medicare-eligible participants; however, this type of action is generally prohibited under various laws.

Medicare Secondary Payer (MSP) rules have provisions in place which prohibit an employer from taking certain actions which would discourage Medicare-eligible participants from enrolling in an employer-sponsored group health plan (or that would encourage Medicare-eligible participants to drop the employer-sponsored group health plan). This includes a prohibition of offering financial or other benefits as incentives not to enroll in the employer-sponsored group health plan, such as paying for or reimbursing Medicare premiums. This prohibition applies when Medicare is or would be the secondary payer to the employer-sponsored group health plan (generally, employers with 20 or more employees). MSP rules also state that employers with 20 or more employees must provide to any employee or spouse aged 65 or older the same benefits under the same conditions that they provide to employees and spouses under age 65.

Representatives from the U.S. Department of Labor (DOL) have also stated informally that encouraging a Medicare-eligible participant to disenroll in an employer-sponsored group health plan may violate Section 510 of the Employee Retirement Income Security Act of 1974 (ERISA). This provision makes it unlawful to discharge or discriminate against a participant for exercising rights under an employee benefits plan.

There are discriminatory concerns with other laws as well. The Age Discrimination in Employment Act (ADEA) and the Americans with Disabilities Act (ADA) provide protections to employees who are age 40 or older or who have disabilities. Employers are prohibited from discriminating against an individual with respect to employee benefits based on their age or disability status. Since individuals can only qualify for Medicare based on their age (65) or receiving a disability determination, discrimination concerns with the ADEA and ADA may become present when employers encourage Medicare-eligible participants to waive coverage under an employer-sponsored group health plan.

The Health Insurance Portability and Accountability Act (HIPAA) also includes some non-discrimination rules. Employers are prohibited from discriminating against employees based on health status, medical conditions, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability. If the goal of the employer is to get Medicare-eligible participants off the group health plan because of actual or perceived bad risk to the employer-sponsored group health plan, then there is a likely violation of the HIPAA non-discrimination rules.

So, when can employers pay for or reimburse Medicare premiums for employees?

Small Employers (under 20 employees)

Small employers with fewer than 20 employees may reimburse employees for Medicare premiums, but the employees must be offered a group health plan with minimum value. Employees don’t have to enroll in the group health plan, but one must be offered to them.

Small Employers (under 50 employees)

Small employers who don’t offer a group health plan to any of its employees may establish a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The QSEHRA may reimburse Medicare premiums, among other things.

Any Size Employer

Employers of any size may establish an Individual Coverage Health Reimbursement Arrangement (ICHRA). ICHRAs allow for the reimbursement of individual major medical and Medicare premiums, among other things. Employers are prohibited from offering the same class of employees the choice between a group health plan and an ICHRA; however, employers may offer one class of employees (e.g., full-time employees) a group health plan and another class of employees (e.g., part-time employees) an ICHRA. It should be noted that Medicare/Non-Medicare status are not permitted classes of employees. An employer couldn’t carve out just
their Medicare employee population into an ICHRA.

Employers of any size may also reimburse retirees for their Medicare premiums. This would generally be done
through a Retiree Health Reimbursement Arrangement (Retiree HRA).