By: HUB’s EB Compliance Team

When employees become eligible for Medicare, due to age, disability, or end stage renal disease (ESRD, or kidney failure), employers often wonder what they can or cannot do with respect to letting employees know about Medicare and other health options. A complex set of rules, known as the Medicare Secondary Payer Rules (the “Rules”) generally prohibit employers from “taking into account” Medicare, as discussed below, among other rules.

Overview of Medicare Secondary Payer Rules

The purpose of the Rules is to protect Medicare financially in two primary ways. First, if an individual has both Medicare coverage and group health coverage as a result of their own active employment or the active employment of their spouse or parent, the group health plan coverage is “primary” to Medicare (i.e., the group health plan pays first). This prevents Medicare from paying claims that can be covered by a group health plan (although there are special rules for individuals with ESRD that are beyond the scope of this article). We discussed situations where Medicare or a group health plan pays primary to Medicare in this prior article. Most plans are written to comply with these rules.

However, the Rules also need to make sure employers cannot avoid having their plans pay first by just getting Medicare recipients off their plans. As a result, the Rules also prevent employers from coercing, inducing, or incentivizing employees, their spouses, or dependents to elect Medicare over employer-sponsored coverage.  This applies to active employees and their spouses regardless of how they become eligible for Medicare.

Current penalties for violating these rules are $10,360 per violation (adjusted annually) in addition to an excise tax equivalent to 25% of the total expenses incurred by the employer (premiums for an insured plan or total costs of a self-funded plan) for all group health plans sponsored by the employer. Additionally, Medicare has the right to seek payment from the insurer or self-funded plan for claims the plan should have paid. Therefore, the financial risk for violating the Rules is steep.

Employers Subject to the Rules

These Rules generally apply to employers who have 20 or more employees (full-time and part-time) worldwide. The “employer” is based on controlled group rules, generally meaning entities that are part of the same corporate group, or that have similar owners may be aggregated together for purposes of the 20-employee account. For Medicare purposes, employers are considered to be over 20 employees as long as they have 20 or more employees for each working day in at least 20 weeks (consecutive or not) during the current or previous calendar year. There are many variables involved in determining employee counts, so it is not as simple as just counting heads.

Additionally, a separate part of the Rules applies to individuals who become eligible for Medicare due to disability. When Medicare is gained due to a disability other than ESRD, a group health plan is secondary to Medicare if the employer has less than 100 employees.

There are special requirements for determining whether the Rules apply to employers participating in multiple employer or multiemployer plans.

Prohibited Actions under the Rules

Employers subject to the Rules, are “prohibited from offering Medicare beneficiaries financial or other benefits as incentives not to enroll in, or to terminate enrollment in, a GHP [Group Health Plan] that is, or would be, primary to Medicare” (See, 42 CFR 411.103). A few examples of prohibited actions include, but are not limited to:

  • Reimbursing Medicare Part A (if applicable), Part B, or Part D premiums to active employees, spouses, or dependents eligible for Medicare.
  • Paying for or reimbursing the costs of a Medicare Supplement or Medicare Advantage Plan.
  • Offering financial incentives, rewards, or other forms of remuneration to Medicare-eligible individuals to drop employer coverage.
  • Telling the Medicare eligible population (or even a single Medicare eligible employee) they “can’t enroll in the employer plan” because they are eligible for Medicare.
  • Imposing longer waiting periods for coverage, or terminating coverage for employees or their dependents once they become Medicare-eligible.
  • Limiting plan benefits or plan reimbursement levels for employees or covered dependents with end stage renal disease/kidney failure.
  • Imposing higher employee contributions only on Medicare eligible employees and their dependents if they choose to enroll in an employer sponsored plan.

This is not an exhaustive list, so other actions are also prohibited. However, this list is intended to provide a sense of what types of actions are not permitted.

A Note about ICHRAs

Notably, the first prohibition is on reimbursing Medicare premiums and yet this is explicitly allowed under individual coverage health reimbursement arrangements, or ICHRAs, as HUB mentioned here. The ICHRA rules do not however allow employers to offer an ICHRA only to their Medicare eligible population. Employers considering offering an ICHRA to their Medicare eligible population must do so within the limitations of the allowable classifications under the ICHRA rules.

Notably, one of the agencies issuing rules related to ICHRAs is the Department of Health and Human Services (“HHS”) which is the parent agency for the Centers for Medicare and Medicaid Services (“CMS”) that enforce the Rules.  Presumably, if the ICHRA rules allowing reimbursement of Medicare premiums were a problem, CMS would have notified HHS.  However, an explicit statement that ICHRAs, if properly designed, do not violate the Rules would be welcome.

Some Reminders and Takeaways

Employees, spouses, or dependents who are Medicare eligible can always voluntarily choose to enroll in Medicare rather than (or in addition to) an employer plan. Additionally, retiree-only plans pay secondary to Medicare (except for the first 30 months of ESRD) and are permitted to require retirees, spouses, and their dependents eligible for Medicare to enroll in Medicare.

Finally, employers can provide information about Medicare, but should be very careful not to encourage employees to enroll in Medicare instead of employer coverage. Bear in mind, the dividing line between providing information and encouraging employees to enroll in Medicare can be quite subjective. Employers may want to err on the side of caution when determining what, if anything to provide employees regarding Medicare. Employers considering providing information could use information from, or direct employees to, medicare.gov.

While this is not a complete discussion of the Rules, employers should be aware of the restrictions described above.  Some employers may incorrectly believe that they can provide incentives to active employees and their dependents to encourage them to move to Medicare, and should reevaluate these practices as soon as possible.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.