Medicare and Employee Benefits

Introduction

Although Medicare is considered individual coverage, it interacts with employer-sponsored coverage in several important ways. As the workforce ages, and as some employees work past what has previously been considered the typical retirement age, employers of all sizes that sponsor group health plans should understand how the benefits they offer are affected when employees are entitled to (i.e., enrolled in) or eligible for^[1] Medicare. The purpose of this issue brief is to provide an overview of the ways in which Medicare and employee benefits intersect, in order to help employers, ensure that they administer their group health plans in a compliant manner.

Medicare & COBRA

In General

The interplay between Medicare and COBRA is complex. At a high level, it’s important to keep in mind that Medicare entitlement (i.e., enrollment) is never a COBRA qualifying event for the employee and will rarely be a COBRA qualifying event for the spouse or dependents.

COBRA & Medicare: The Employee

The way COBRA is handled for an employee generally depends on whether Medicare entitlement occurred before or after another qualifying event (e.g. termination of employment or reduction in hours). When an employee becomes entitled to Medicare and then experiences a COBRA qualifying event (e.g. termination of employment or reduction in hours), the employee will generally be entitled to 18 months of COBRA continuation coverage. On the other hand, when an employee is covered by COBRA before becoming entitled to Medicare, the employer may terminate COBRA early.

An employee is permitted to delay entitlement to Medicare without penalty if the employee has coverage under a group health plan. COBRA continuation coverage is not considered group health plan coverage for this purpose. Therefore, if an employee delays Medicare enrollment while enrolled in COBRA, that employee may be subject to late enrollee penalties.

COBRA & Medicare: Spouses and Dependents

An employee’s Medicare entitlement will be a first or second COBRA qualifying event for the spouse or dependents only if the entitlement would have caused a loss of eligibility for the employee under the employer’s group health plan. Since Medicare Secondary Payer (MSP) rules, which apply to employers with 20 or more employees, prohibit a group health plan from carving out Medicare-entitled employees from eligibility, Medicare entitlement will rarely trigger a COBRA qualifying event for spouses or dependents. So, for example, when the employee has the option to remain on the group health plan but voluntarily chooses to terminate the group health plan coverage and move to Medicare, a COBRA continuation right is not triggered for the spouse or dependents who then lose the group health plan coverage. If there is a desire to continue coverage for the spouse, in most cases the employee would also have to remain enrolled in the group health plan, perhaps choosing to have double coverage under the group health plan and Medicare for a period. NOTE: This is commonly handled incorrectly, and employers/TPAs often offer COBRA in such a scenario. However, there is risk in doing so: since providing coverage technically not required under federal COBRA continuation rules, the carrier could refuse to provide claim coverage.

However, there is a general extension rule that applies to spouses and dependents when an employee becomes entitled to Medicare prior to a COBRA qualifying event (e.g. termination of employment or reduction in hours). Under this rule, the spouse and/or dependent is entitled to COBRA for the greater of:

• 18 months from the COBRA qualifying event; or
• 36 months from the date of the employee’s Medicare entitlement.

Example: Employee becomes entitled to Medicare upon reaching age 65 in February 1, 2019 but maintains coverage under the employer’s group health plan for himself and his spouse (dual coverage for the employee). On June 30, 2019, the employee retires, and the group health plan coverage terminates for the employee and his spouse. The employee may continue coverage under COBRA for up to 18 months. However, the spouse has the option to continue coverage under COBRA for up to 31 months (the remainder of the 36 months from when the employee became entitled to Medicare).

When an employee’s COBRA coverage is terminated early due to the employee’s Medicare entitlement (i.e. the employee enrolled in COBRA and then later enrolled in Medicare), COBRA coverage for the spouse and dependents will continue until the end of the maximum coverage period, but there is no special extension.

Example: Employee retires June 30, 2019, and the group health plan coverage terminates for the employee and the spouse. Both elect to continue coverage under COBRA. Employee becomes entitled to Medicare in September 2019 and COBRA coverage terminates. The spouse may continue coverage under COBRA for the remainder of the 18 months.

Prescription Drug Coverage and the Medicare Part D Creditable Coverage Reporting Requirement

In General

Plan sponsors of group health plans that offer prescription drug coverage must comply with the Part D Notice of Creditable Coverage requirement for all Part D eligible individuals (including active employees, disabled employees, COBRA participants, retirees, and covered spouse/dependents) who are enrolled in (or seeking to enroll in) the plan.

There is also a separate reporting requirement to CMS—this report is due within 60 days of the beginning of the plan year, and within 30 days if the plan’s creditable status changes or the plan is terminated during the year. 

Who Are Part D Eligible Individuals?

Individuals are considered “Part D eligible” if they: 

1. Are enrolled in either Medicare Part A or Part B; and
2. Live in the service area of a Part D plan. 

Because it may be difficult for a plan sponsor to identify which individuals are eligible for Part D, the sponsor has the option of entering into a voluntary data-sharing agreement (VDSA) with CMS, under which CMS will use group health plan enrollment data provided by the plan sponsor to tell the plan sponsor which individuals are Medicare beneficiaries. Alternatively, a plan sponsor could choose to provide the disclosure to everyone who is eligible to enroll in its prescription drug plan (regardless of whether they are Part D eligible); this is the more common approach.

What Is Creditable Coverage?

In general, prescription drug coverage is considered creditable if the actuarial value of the coverage equals or exceeds the actuarial value of standard prescription drug coverage under Medicare Part D using generally accepted actuarial principles and following CMS actuarial guidelines.

Often an insurance carrier or administrator will provide information to an employer detailing whether a plan’s drug coverage is creditable. If an employer does not receive this information from the carrier or administrator, the employer must make the determination.  

If an employer is not applying for the subsidy available to sponsors of a qualified retiree prescription drug plan, the employer can use a simplified method for determining whether the drug coverage in a plan is creditable. If the plan does not meet the standards under the simplified method, it may be necessary to obtain an actuarial determination. For most high-deductible health plans (HDHPs), the prescription drug coverage will be considered integrated with the HDHP (with shared deductible and maximum limits, if any); and when that’s the case, the HDHP will NOT meet the simplified determination criteria for creditable coverage status because the annual deductible will always exceed $250 (thereby requiring an actuarial determination). That doesn’t automatically mean it’s not creditable; however, an actuarial determination is then required to discern whether the actuarial value of the coverage equals or exceeds the actuarial value of standard prescription drug coverage under Medicare Part D.

When Must Notice Be Provided?

The employer must provide notice of creditable (or non-creditable coverage) to Part D eligible individuals at the following times:

• Prior to commencement of the annual open enrollment period for Part D (October 15);
• Prior to an individual’s initial enrollment period (IEP) for Part D;
• Prior to the effective date of coverage for any Part D eligible individual who enrolls in the employer’s prescription drug coverage;
• Whenever the employer no longer offers prescription drug coverage or changes it so that it is no longer creditable or becomes creditable;
• Upon request by a Part D eligible individual.

The first three occasions use the term “prior to,” which CMS has indicated means within the last twelve (12) months. Therefore, if employers provide the notice when individuals are newly eligible and during open enrollment (or prior to Part D enrollment) each year, they should meet the timing requirements for these occasions. 

CMS has indicated that a plan sponsor providing a disclosure notice may generally provide a single notice to both the eligible individual and all of his or her eligible dependents. However, a separate disclosure notice must be provided if the plan sponsor knows that any eligible spouse or dependent resides at an address different from that of the participant. 

Consequences of Failure to Provide Notice

Although there is no penalty under the Part D Creditable Coverage Notice requirement associated with failing to provide this notice, doing so can create an employee relations issue if an employee relied on the employer’s communication of the plan’s creditable status and failed to enroll in Medicare Part D as a result. If an individual does not enroll in Medicare Part D during their initial enrollment period (IEP), and does not have creditable prescription drug coverage for any continuous period of 63 days or longer following the end of the IEP, then the individual may face a late enrollment penalty/higher premium for Part D coverage upon enrolling.

Additionally, under ERISA, there could be issues from both a compliance standpoint (e.g., if a summary of material modifications is required and isn’t sent) and a fiduciary obligation standpoint (for representing that non-creditable coverage was creditable).

Medicare and Health Savings Accounts (HSAs)

Medicare Entitlement Interferes with HSA Eligibility

Many employees who reach age 65 are covered by High Deductible Health Plans (HDHPs) offered by their employer, and they may contribute to an HSA. Medicare is considered “impermissible other coverage” for purposes of HSA eligibility. Therefore, when a person is actually entitled to (not just eligible for) Medicare, that person is not able to establish, contribute to, or receive contributions to an HSA. That being the case, any funds previously contributed to the HSA may be used to reimburse qualifying medical expenses until the HSA funds are exhausted.

Delaying Medicare Entitlement to Preserve HSA Eligibility

If an individual is willing to delay Medicare enrollment, then if that individual is otherwise HSA eligible (i.e., has an HDHP, does not have any other impermissible coverage, and can’t be claimed as another person’s tax dependent), then the individual should be able to continue contributing to an HSA. But the individual should keep in mind that when they are ready to enroll in Medicare, the effective date may be retroactive. For this reason, it’s important to stop making (or to make a pro rata reduction of) HSA contributions for a period (typically 6 months, but this should be confirmed) before Medicare enrollment is requested.

A Family Member’s Medicare Entitlement Does not Impact an Employee’s HSA Eligibility

It is important to note that Medicare entitlement affects HSA eligibility only for the person who is entitled to Medicare. Therefore, a spouse’s Medicare entitlement (and resulting HSA ineligibility) does not impact an individual’s ability to establish or maintain and contribute to an HSA if the individual is otherwise eligible to do so. And funds from an individual’s HSA may be used to reimburse the qualifying medical expenses of a spouse who is not HSA eligible. This even includes payment for a spouse’s Medicare Part A, B, C, or D premiums as long as both the spouse and the HSA account holder are age 65 or older.

The Employer’s Role

Although an employer is not responsible for monitoring an employee’s Medicare status for purposes of HSA eligibility, understanding this interplay can be helpful in communicating HSA eligibility requirements to employees. The repercussions of making contributions to an HSA when not eligible to do so can be expensive, and employers that offer HSAs alongside an HDHP have an incentive to make employees aware of any eligibility limitations before issues arise that could adversely affect employee relations.

Medicare Premium Reimbursement

In General

Employers often wonder whether they are able to assist their Medicare-entitled employees in paying Medicare premiums. In general, paying for or reimbursing an employee’s Medicare premiums is not permitted, since it creates an impermissible “employer payment plan” that does not comply with health care reform requirements. And for employers subject to Medicare Secondary Payer (MSP) rules, offering to reimburse Medicare premiums (including on a pre-tax basis through a cafeteria plan) generally constitutes an impermissible incentive to elect Medicare in lieu of the employer’s group health plan.

Medicare Premium Reimbursement Arrangements

In 2015, regulators made a limited exception to the general ACA prohibition on reimbursement of individual market premiums for Medicare Premium Reimbursement Arrangements. Such arrangements must meet certain criteria to qualify for the exception. But for an employer who is subject to the MSP rules, this limited exception is not viable, since the arrangement still violates the MSP prohibition on offering a financial incentive to encourage refraining from enrolling in a group health plan that would otherwise pay primary to Medicare. In other words, even if an employer could avoid violating the ACA with a properly structured Medicare Premium Reimbursement Arrangement, it would still have a problem from an MSP perspective if the employer has at least 20 employees.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

Under a new HRA option that will be available for plan years beginning on or after January 1, 2020, employers may offer an “individual coverage HRA,” or “ICHRA,” to employees enrolled in individual health coverage or Medicare and allow the coverage premiums (including Medicare premiums), in addition to other §213(d) qualifying medical expenses, to be reimbursed by the HRA. The Departments take the position that as long as an ICHRA is offered on the same terms and conditions to employees in specified classes (not only to Medicare-eligible employees) and is not set up to reimburse only non-Medicare expenses, it may be offered to Medicare-eligible employees without running afoul of the MSP rules. In addition, because those who are eligible for the ICHRA cannot also be eligible for a traditional group health plan, there is no financial incentive to decline the group health plan. More information on the ICHRA may be found in our issue brief here.

Medicare Entitlement and Cafeteria Plan Election Changes

An employee’s Medicare entitlement (or loss of eligibility) may impact the employee’s pre-tax elections through a cafeteria plan. When an individual becomes entitled to Medicare, they may make a prospective election change to cancel or reduce coverage under the group health plan. Similarly, a loss of Medicare eligibility allows the individual to make a prospective election change to begin or increase their coverage under the group health plan.

Summary

As indicated in the discussion above, Medicare intersects with employee benefits in several ways that impact group health plans and employers of all sizes. Understanding how an employee’s eligibility for or entitlement to Medicare may affect that employee’s eligibility for certain benefits and disclosures is an important aspect of an employer’s overarching compliance program. Although Medicare is a complex benefit, and its relationship to employee benefits may not always be simple, the costs of failing to comply with these requirements can be steep—for both the employer and its employees. It is a worthwhile investment of time to understand how Medicare impacts a plan sponsor’s obligations and to ensure that any plan is being operated in accordance with these requirements.

[1] Eligibility for and entitlement to Medicare are separate concepts. A person who is entitled to Medicare is both eligible for and enrolled in Medicare. Conversely, a person may be eligible for Medicare but not yet enrolled. This person would be eligible for Medicare but not entitled to Medicare.