Active employer coverage means you are still actively working, not retired. When an employer has fewer than 20 employees, Medicare is considered the primary insurance once you turn 65. Your employer coverage will be secondary, meaning it will only pay claims after Medicare has paid. If you don’t sign up for Medicare, your healthcare may not be covered at all. Learn more about Medicare Premium Reimbursement below.
If there are 20 or more employees, it’s the opposite – your employer coverage is primary, and Medicare is secondary. Under this situation, you can keep your employee coverage and enroll in Medicare later without any penalties.
These same rules apply if your group health coverage is through your spouse’s employer.
The right decision depends on the costs and benefits of your employee coverage vs. Medicare. Employee health insurance is a major expense for employers. It hits small business owners especially hard because they pay more money to ensure their older workers.
Signing up for Medicare can be a cost saver for your employer since the monthly Medicare Part B premium is probably less than the premium for your employer-sponsored coverage.
The answer is…it depends on the size of the company and if certain criteria is met.
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.
Medicare Premium Reimbursement Arrangements ARE ALLOWED for Some Employers.
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. If 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 applicable 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:
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) provision (see below).
Medicare Premium Reimbursement Arrangements ARE NOT ALLOWED for Groups with 20+ Employees
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.
Can my employer make me elect Medicare coverage when I turn 65?
It’s illegal for an employer to force any actively working employee to choose Medicare instead of their group health plan. You have the option to leave the group health plan and choose Medicare as your primary insurance instead, but your employer cannot make you do so.
Nor can an employer offer lesser benefits to people who are eligible for Medicare. It’s also against the law to offer you money or other incentives to choose Medicare instead of the employee health plan.
What about COBRA
Medicare coordinates differently with COBRA than it does with active coverage. This is important because so many people get this wrong and become subject to late enrollment penalties.
When you are still actively working at a large employer, your Group Insurance pays primary and Medicare pays secondary. The opposite is true of COBRA. Medicare pays first and COBRA pays second. Cobra works well when you are under age 65, but as you near your Medicare eligibility you must enroll in Part A and B during your Initial Enrollment Period – the seven month window of time that is three months prior to your 65th birthday, your birthday month, and three months following your birthday month. You need to enroll because Medicare will be your primary coverage and COBRA becomes the secondary payer. Failure to enroll during your IEP will result in a lifelong penalty.
The Option to Choose Medicare as your Primary Insurance
People with large group employer insurance also have another option. You can leave your group health plan and choose Medicare as your primary insurance, and then add a Medigap plan. This can often be cheaper for you or your spouse. For many people, it will also reduce your deductible spending and eliminate all doctor copays.
Whether this is cost-effective depends on how much your employer coverage costs you each month in your payroll deductions. Your plan deductible, copays, and your medication usage also are factors. If you are married and one spouse is younger, you must also consider the cost of health insurance for the spouse of the Medicare recipient
One of our licensed agents can help you decide if you should enroll in Part B now or later. We often meet people that we advise staying with their group plan for now if that makes more sense.
This article is not intended to be legal or tax advice, and you should study all IRS defined contribution and CMS Medicare Secondary Payer guidance publications. Keep in mind, also, that the rules tend to evolve and change over time, so always be sure to keep up with the latest developments.
Medicare Premium Reimbursement.