Employers with an aging workforce often ask whether they can remove Medicare-eligible employees from their group health plan and instead reimburse them for their Medicare premiums.
The goal is understandable. Medicare may provide comprehensive coverage for eligible employees, and reimbursing Medicare premiums can appear to be a more cost-effective alternative to keeping those employees on the employer’s group health plan.
However, the answer is generally no.
While there are reimbursement arrangements that can be used in certain situations, employers generally cannot simply require Medicare-eligible active employees to leave the group health plan and begin receiving tax-free reimbursements for their Medicare premium
Why Can’t Employers Simply Reimburse Medicare Premiums?
Federal laws governing employer-sponsored health plans prohibit employers from designing benefit programs that improperly encourage or require active employees to move from employer-sponsored coverage to Medicare.
For active employees, Medicare is generally not a substitute an employer can require in place of group health coverage.
Simply removing Medicare-eligible employees from the health plan and reimbursing their premiums could create significant compliance concerns.
Can an Employer Offer Medicare-Eligible Employees Cash Instead?
Generally, no.
Providing a cash allowance specifically to purchase Medicare coverage is usually not a compliant substitute for employer-sponsored group health coverage.
Although employers are always free to increase taxable compensation, taxable wages are different from providing tax-advantaged health benefits.
Could an ICHRA Be Used?
Possibly, but only under the right circumstances.
An Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers to reimburse employees for individual health insurance premiums, including Medicare premiums, if the employee is enrolled in individual coverage.
However, an employer cannot simply move all Medicare-eligible employees into an ICHRA because they are Medicare eligible.
Instead, employees must fall within permitted employee classes established under the ICHRA regulations.
Examples of permitted classes include:
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees working in different geographic locations
- Employees covered by a collective bargaining agreement
- Other classes permitted under federal regulations
Age or Medicare eligibility alone is not a permitted employee class.
Whether an ICHRA is available depends on how the employer’s workforce is structured and whether the proposed employee classes satisfy the applicable rules.
Would a QSEHRA Work?
Usually not.
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is only available to employers that do not offer a group health plan to any employees.
If an employer wants to continue offering a traditional group health plan to active employees while reimbursing Medicare premiums for only a subset of employees, a QSEHRA generally is not an option.
For employers already sponsoring group health insurance, the QSEHRA rules prevent this approach.
Can a Retiree HRA Be Used?
Not for active employees.
A Retiree Health Reimbursement Arrangement (Retiree HRA) is designed to reimburse healthcare expenses for former employees after retirement.
Although Retiree HRAs commonly reimburse Medicare premiums, they generally cannot be used as a vehicle for active employees who simply become eligible for Medicare while continuing to work.
Retirement status, not Medicare eligibility, is what distinguishes participants in a Retiree HRA.
What If an Employee Chooses Medicare Voluntarily?
Some active employees voluntarily enroll in Medicare while remaining employed.
Whether Medicare becomes the primary payer and how employer coverage coordinates with Medicare depends on several factors, including:
- Employer size
- Employee status
- The employer’s health plan
- Applicable Medicare Secondary Payer rules
Employers should review these situations carefully before making changes to employee benefits.
Are There Any Situations Where Medicare Premiums Can Be Reimbursed?
Yes.
Employers may be able to reimburse Medicare premiums in situations such as:
- Through a compliant ICHRA when the employee is in a permitted employee class and all applicable requirements are satisfied.
- Through a QSEHRA if the employer qualifies and does not offer a group health plan.
- Through a Retiree HRA for eligible retired employees.
The appropriate solution depends on the employer’s circumstances and overall benefits strategy.
What Should Employers Consider Instead?
If healthcare costs for Medicare-eligible employees have become a concern, employers should evaluate their overall benefits strategy rather than focusing on Medicare eligibility alone.
Possible approaches may include:
- Reviewing group health plan options during renewal.
- Evaluating whether an ICHRA fits the organization’s workforce.
- Reviewing employee classifications for compliance.
- Considering retiree benefits separately from active employee benefits.
Because multiple federal rules apply, changes should be evaluated carefully before implementation.
How Empower Helps Employers Evaluate Medicare Reimbursement Options
Questions involving Medicare, HRAs, and active employees can be complex.
Empower helps employers understand the available reimbursement arrangements, evaluate benefit strategies, and administer compliant HRA programs when appropriate.
Our team works with employers, brokers, and benefit advisors to identify solutions that align with both organizational goals and applicable regulations.
Questions About Medicare Premium Reimbursements?
If you’re considering changes to your health plan for Medicare-eligible employees, it’s important to understand the compliance rules before making a decision.
Contact Empower to discuss your organization’s situation. We can help you evaluate whether an HRA solution may be available and explain the options that fit your workforce and benefit strategy.
