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In today’s environment employees are choosing to delay retirement. According to Matthew Rutledge of Boston College’s Center for Retirement Research, employees are retiring three years later than they did in 1980’s.
Even more, employees sometimes launch a second or third career for multiple reasons. In doing so, they create challenges for employers making decisions regarding how best to fund health insurance and what coverage to provide. It is important for employers to understand the regulations that govern Medicare as they relate to employer involvement in offering and financing for group health coverage.
In general, eligibility for Medicare starts on the first day of the month in which an employee turns 65, as long as that employee has worked in the United States for at least 10 years, contributing through a payroll tax deduction, to the Medicare program. While there are other avenues for eligibility such as certain serious illnesses and disability, for the purpose of this blog we will only focus on standard eligibility based on age.
Once an employee becomes eligible for Medicare, they must make decisions regarding how and when to enroll. These decisions can affect employer decisions regarding employer-sponsored coverage.
Regulations under Medicare, found under the Medicare Secondary Payer
rules specifically prohibit employers to provide any incentive that would encourage an employee to enroll in Medicare. In addition, neither an employer nor an insurance carrier can take into account an employee’s Medicare status based on their age or disability. Employers are prohibited from denying or terminating employer-sponsored coverage simply on the assumption that an employee has or can enroll in Medicare. Employers cannot impose limitations to those who are entitled to Medicare by providing less comprehensive coverage, by excluding certain benefits, reducing benefits, imposing higher deductibles or co-insurance or by charging more for the coverage provided. Employers cannot provide misleading information or any information that would encourage an employee to waive employer-sponsored coverage. As with all other rules regarding benefit enrollment similarly situated employees (those of the same level within the organization) must be offered equivalent benefits and benefit election opportunities. Medicare-eligible employees are not considered a separate class of employee and therefore must be included in that similarly situated group based solely on their employment status.
If an employee chooses to opt out of employer-sponsored coverage and enroll in Medicare, an employer can still offer vision or dental coverage, since these services are not offered by traditional Medicare plans. An employer cannot, however, offer a plan that provides supplemental benefits for Medicare-covered services. In fact, even offering this type of coverage under the law is a violation and each offer, whether verbal or in writing, is considered a violation of that law. Each offer of supplemental coverage can lead to a penalty of $5,000 per violation.
Employers cannot offer employees the ability to be reimbursed for Medicare premiums on a pre-tax basis under a cafeteria plan (also known as Section 125 of the IRS code) because doing so can be considered an incentive to encourage employees to enroll in Medicare and waive employer-sponsored coverage. There is an avenue, however, for employers to assist employees with the premiums for Medicare Part B, Part D or Medicare supplement plans.
Health Reimbursement Arrangements or HRAs allow employers to designate a set amount of funds toward the cost of various services, including the costs associated with paying for Medicare coverage. There are various types of HRAs such as Individual Coverage Health Reimbursement Arrangements (ICHRA), and Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) each of which have different rules that can impact an employer and employees.
An ICHRA is available to employers of any size. A QSEHRA can only apply to employers that are not “applicable large employers” or ALE under the Affordable Care Act. If an employer is considered an ALE, it is a good idea to consult a tax advisor before making any decisions concerning the implementation of an HRA into your benefit program.
An HRA can only be funded by an employer. Employees are not able to contribute. The employer directs what benefits can be applied to the HRA and one of the allowable costs that can be applied to an HRA is the payment of Medicare Part B, D and Medicare Supplement premiums. An HRA, however, cannot be established strictly for the purpose of reimbursing Medicare costs and cannot be offered solely to those who are enrolled in or are eligible for Medicare.
As with other types of benefits offered by employers, care must be taken to make sure that the HRA provided is non-discriminatory. The test to determine nondiscrimination eligibility can be reviewed under Code 105(h) of the IRC.
While the IRS has confirmed that the rules in this code apply to HRAs, it has not, unfortunately, provided comprehensive guidance as to how the rules apply to this type of benefit. In consideration of the lack of guidance, some general rules should be applied to determining discrimination. For example, the benefit should not be limited to Highly Compensated Employees (HCEs) nor should it be based upon age or years of service. An HRA administrator should be able to provide an employer with specific guidelines that will avoid any concerns regarding discrimination.
Employees often have questions regarding Medicare and how their enrollment can affect the choices they make when electing employer-sponsored coverage. Employees with questions regarding Medicare should be directed to their local State Health Insurance Assistance Program or SHIP. This program, available in all 50 states, provides free and unbiased information to employees regarding Medicare including enrollment options, utilization concerns and help with claim questions. Each state has its own program, run through the state Area Agency on Aging.
For employers, a benefits adviser can be a great partner for any employer who needs guidance on how to resolve concerns surrounding their employees who are currently or will become eligible for Medicare. Employers can also get help via the Employee Benefits Security Administration or EBSA, which can answer employer questions concerning laws and regulations surrounding benefits. This site is run by the Department of Labor and includes myriad resources for employers of every size.
To learn more and get access to a benefits adviser, click here.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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