Can Employers Pay Their Employees’ Medicare Premiums? At AHCP, we’re starting to get this question more and more frequently from brokers. We believe there are two reasons for this:
It’s a good question. Because of the Affordable Care Act (ACA), age is a huge rating factor for small-business employers, with health insurance carriers charging up to three times as much for older workers as they do for younger employees. While larger and self-insured companies are not subject to the ACA’s modified adjusted community rating rules, age is a big rating factor for them as well.
So what’s the answer? Can an employer pay for Medicare Part B and D, Medicare Advantage, and/or Medicare Supplement Insurance premiums for their employees, and either require or encourage them to drop off the group health plan? If so, it might be a good strategy for companies who have seen their premiums skyrocket in recent years, and it could be a great way for brokers to save their clients some money.
We already know that a retiree-only HRA is allowed. Per IRS guidance in 2013, a retiree-only HRA is considered a “group of one” and therefore is not subject to the rules applicable to group health plans under the Affordable Care Act. In other words, it would be allowed even if QSEHRAs were not. Still, that does not answer our question about reimbursing active employees for Medicare premiums.
This topic is discussed in IRS Notice 2015-17, which was issued February 18, 2015. Below is the wording from the notice, followed by an explanation of what it means.
An arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan, as described in Notice 2013-54, and if such an arrangement covers two or more active employees, is a group health plan subject to the market reforms. An employer payment plan may not be integrated with Medicare coverage to satisfy the market reforms because Medicare coverage is not a group health plan.
However, an employer payment plan that pays for or reimburses Medicare Part B or Part D premiums is integrated with another group health plan offered by the employer for purposes of the annual dollar limit prohibition and the preventive services requirements if
(1) the employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
(2) the employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B;
(3) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and
(4) the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.
In short, the government is saying that an employer cannot simply pay Medicare premiums for its active employees. However, if the employer offers group health insurance and Medicare-eligible employees are given the option to sign up for that group health coverage, the employees can choose to waive the group health coverage and the employer can reimburse the employees for Medicare Part B, Medicare Part D, and Medicare Supplement Insurance premiums.
This is huge. As long as a company does not force or pressure employees to drop the group health coverage and instead, sign up for Medicare, it can incentivize Medicare-eligible employees to choose this option by paying some or all of the premiums. This can be a win-win: the employer may see the group premiums decrease as older workers drop off the plan, and Medicare-eligible employees may save money and, in many cases, get better coverage.
However, the IRS does issue a word of caution, and it’s a big one:
Note that to the extent such an arrangement is available to active employees, it may be subject to restrictions under other laws such as the Medicare Secondary Payer (MSP) provisions.
According to the Centers for Medicare and Medicaid Services, these MSP rules usually kick in when 1) an individual is 65 or older, 2) is covered by a group health plan through employment or spouse’s current employment, and 3) the employer has 20 or more employees (including a multi-employer group with 20 or more employees). In this situation, the group health plan is primary and Medicare is secondary, so the government really doesn’t want employers to incentivize employees to cancel the group health coverage; doing so would be a violation of the MSP provisions.
In summary, companies with fewer than 20 employees that offer group health coverage that pays secondary to Medicare (those not subject to the MSP rules) may be able to pay for the Medicare Part B, Part D, and Medicare Supplement Insurance premiums for their active employees. This is known as a Medicare Premium Reimbursement Arrangement. However, this is not an option for companies with 20 or more workers that are subject to the Medicare Secondary Payer provisions. All companies, regardless of size, can pay the health insurance or Medicare premiums for their retired employees, but no company can pay for individual health insurance coverage for their active employees.
Whew… that was a lot, but hopefully this clears up a few things for you and gives you some ideas that will help you save your clients money this fall.
This article is not intended to be legal or tax advice, and agents should study all of the IRS defined contribution and CMS Medicare Secondary Payer guidance before advising their clients. Keep in mind, also, that the rules tend to evolve and change over time (and with a presidential election coming up, they’re likely to change again), so always be sure to keep up with the latest developments. Good luck!