Medicare & Employee Benefits

September 2025

Although Medicare is considered individual coverage, it interacts with employer-sponsored coverage in several important ways. As the workforce ages and more 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 eligible for Medicare. Medicare is a complex benefit and its relationship to employee benefits may not always be simple.

Medicare Basics

Individuals generally become eligible for Medicare in three ways:

• Age-based (65 or older);
• Disability-based; and
• Due to End Stage Renal Disease (ESRD).

Amyotrophic Lateral Sclerosis (ALS aka Lou Gehrig’s disease) may also trigger Medicare eligibility.

Medicare Eligibility vs. Medicare Entitlement  It is important to understand the distinction between being eligible for Medicare and being entitled to Medicare.   Medicare Eligibility: An individual is eligible for Medicare but the individual is not yet enrolled in Medicare and Medicare coverage is not effective.  Medicare Entitlement: An individual is entitled to Medicare when they are both eligible and enrolled in Medicare (and Medicare coverage is effective).

Medicare Part A – Hospital Insurance

Individuals who are receiving social security benefits when they become eligible for Medicare (e.g., upon turning 65) are automatically entitled to (enrolled in) Medicare. However, individuals who are not yet receiving social security benefits when they become eligible for Medicare will need to sign up for Medicare Part A and can delay enrollment if desired.

For those who become eligible for Medicare upon achieving age 65, if they sign up for Medicare during their initial enrollment period (3 months prior to and 3 months following the month the individual turns 65), coverage starts the month the individual turns 65; unless the individual’s birthday is on the 1^st of the month, in which case coverage starts the month prior to their birthday month. For those who delay enrollment beyond the initial enrollment period, coverage is retroactive up to 6 months, but never earlier than the month the individual turned 65.

Medicare Part B – Medical Insurance

Upon becoming eligible for Medicare, individuals can delay enrollment in Medicare Part B but will face a late enrollment penalty if enrollment doesn’t occur within 8 months of losing employer-sponsored coverage tied to current employment status (or current employment status of a spouse). The potential penalty is 10% added to the monthly premium for each year the individual delays enrollment without other creditable coverage. For this purpose, group health plan coverage offered by employer with <20 employees (where the plan is a secondary payer to Medicare) as well as COBRA and retiree coverage do NOT count as creditable coverage for this purpose.

If an individual enrolls in Medicare Part B during the initial enrollment period (e.g., upon turning 65), coverage is effective the month the individual turns 65. If an individual delays enrollment, coverage goes into effect the month after an individual signs up.

Medicare Part D – Prescription Drug Coverage

An individual doesn’t become eligible for Medicare Part D until the individual is entitled to (enrolled in) Medicare Part A or Part B (or both). Upon becoming eligible for Medicare Part D, individuals can delay enrollment but will incur a late enrollment penalty if the individual goes 63 or more days without creditable prescription drug coverage. For this purpose, creditable coverage is prescription drug coverage that is expected to be as good or better than what is available via Medicare Part D. The potential penalty is 1% added to the monthly premium for each month of non-creditable coverage.

If an individual enrolls in Medicare D during the initial enrollment period (e.g., upon turning 65), coverage is effective the month the individual turns 65. If an individual delays enrollment, coverage goes into effect the month after an individual signs up.

Other

Some individuals might choose Medicare Part C, also known as Medicare Advantage, instead of enrolling in Medicare Parts A, B and D. Medicare Advantage combines Part A and Part B coverage and usually Part D as well. It might also include benefits such as vision, dental, etc.

In addition, some individuals may enroll in Medigap (or supplemental insurance), which could cover cost-sharing (e.g., deductibles, coinsurance and copays) incurred under Medicare coverage.

Medicare Secondary Payer (MSP) Rules

The Medicare Secondary Payer (MSP) rules are federal regulations designed to protect Medicare beneficiaries and ensure that group health plans appropriately coordinate benefits with Medicare. These rules mandate that in most cases employer-sponsored health plans pay first, with Medicare acting as a secondary payer. Additionally, when the employer’s group health plan is the primary payer under MSP coordination of benefit rules, MSP regulations prohibit group health plans from taking into account an individual’s Medicare entitlement when offering coverage and from providing financial or other incentives to encourage Medicare-eligible individuals to drop the employer-sponsored coverage.

Prohibition on “Taking into Account” Medicare

The MSP rules prohibit group health plans from “taking into account” a person’s Medicare eligibility or entitlement when offering health coverage. This means employers subject to the MSP rules (generally, those with 20 or more employees) cannot discriminate against employees or their dependents based on Medicare eligibility or enrollment. For example, an employer cannot limit or terminate benefits, charge a higher employee contribution, or offer reduced health plan options to active employees and their family members based on their eligibility for Medicare.

Same Benefits, Same Conditions

The MSP rules require employers to provide a current employee or their spouse who is 65 or older with the same benefits, under the same conditions, as those that are provided to employees or spouses who are under age 65.

Prohibition on Offering Certain Incentives

The MSP rules also prohibit employers from offering financial or other incentives to encourage Medicare-eligible individuals to decline or terminate employer-sponsored health coverage in favor of Medicare where the employer-sponsored coverage would pay primary. This rule would prohibit doing things such as offering opt-out incentives based on Medicare-eligibility, offering to pay for Medicare premiums or supplements, or allowing Medicare premiums to be paid on a pre-tax basis through a cafeteria plan.

Choice Between Group Health Plan & Medicare

Small Employer – Secondary Payer

For a small employer (e.g., <20 employees for age-based Medicare), where the employer’s group health plan is the secondary payer to Medicare, the plan could potentially exclude individuals who are eligible for Medicare. Alternatively, the plan could have a Medicare estimation clause under which the plan will only pay secondary regardless of whether the individual is enrolled in Medicare (thereby providing only limited coverage to those who are Medicare-eligible). In such cases, individuals who are eligible for Medicare will need to enroll in Medicare right away to avoid limited coverage and/or late enrollment penalties.

Employer’s Plan is the Primary Payer

When the employer’s plan is the primary payer, MSP rules require that the same coverage continue to be available to those who are Medicare-eligible, so those who are eligible for Medicare could delay Medicare enrollment, drop the employer’s plan and move to Medicare, or choose to have dual coverage (in which case Medicare would be the secondary payer). Medicare-eligible individuals may want to retain the employer’s coverage to continue coverage for a spouse or dependents. They may also want to delay Medicare enrollment to continue HSA contributions.

Retiree or COBRA Coverage

Like coverage offered by a small employer, retiree or COBRA coverage is typically a secondary payer to Medicare, in which case the plan might exclude or limit coverage for those who are Medicare-eligible. Individuals who are eligible for retiree or COBRA coverage will need to enroll in Medicare right away to avoid limited coverage and/or late enrollment penalties. NOTE: Family members have independent COBRA continuation rights and would be able to continue COBRA for the remainder of their maximum coverage period. 

Medicare & COBRA

The interplay between Medicare and COBRA is complex. In addition, the MSP rules addressed above may impact a qualified beneficiary’s access to COBRA. 

Medicare as a COBRA Qualifying Event

Although Medicare entitlement is listed as a COBRA-triggering event, it will not be a qualifying event for any employee, spouse, or dependent when the employer is subject to the MSP rules described above. Because the MSP rules prohibit employers from “taking into account” Medicare entitlement, the employer’s group health plan cannot terminate a participant’s coverage due to Medicare eligibility or enrollment when the employer’s group health plan would be the primary payer. And if there is no loss of eligibility tied to Medicare eligibility or enrollment, there is no COBRA qualifying event. 

If the employee chooses to enroll in Medicare and drops the employer-sponsored coverage, it is a voluntary termination of coverage that does not trigger a COBRA qualifying event for the enrolled spouse and dependents who lose coverage. NOTE: Employers/TPAs often incorrectly offer COBRA to spouses and dependents in such a scenario. However, there is risk in doing so because the carrier (or stop-loss vendor) could refuse to provide claims coverage when an offer of COBRA is not required, and doing so could be interpreted as a prohibited incentive under MSP rules.

Small Employers Small employers not subject to the MSP rules (i.e., those with <20 employees) are not prohibited from terminating coverage for an employee, spouse, or dependent when the individual becomes eligible for Medicare. In such cases, the loss of the employee’s coverage due to Medicare entitlement will be a COBRA qualifying event for covered spouse and dependents providing for a 36-month maximum coverage period.  Retiree Coverage Similarly, Medicare entitlement may cause a loss of eligibility for retiree coverage. In such a case, Medicare entitlement would constitute a qualifying event for the affected spouse and dependent children, resulting in a maximum continuation coverage period of 36 months.

Second Qualifying Event Extension

For a second qualifying event to trigger an extension of the maximum coverage period for a covered spouse or dependent, the event must also be a first qualifying event. Since Medicare entitlement will not be a first qualifying event for employers subject to the MSP rules, it follows that Medicare entitlement will not be a second qualifying event resulting in an extension of the maximum continuation coverage period for spouses or dependents either.

Special Extending Rule for Spouses and Dependents

In limited circumstances, Medicare entitlement can result in an extension of COBRA for spouses and dependents. Under this special rule, when a covered employee experiences a termination of employment or reduction in hours within 18 months AFTER enrolling in Medicare (i.e., employee had dual coverage when the qualifying event occurred), the employee’s covered spouse and dependents (but not the employee) will be entitled to an extended COBRA continuation coverage period of the remainder of 36 months from the date the employee became entitled to Medicare. The employee would remain entitled to the 18-month maximum coverage period following their qualifying event.

Example
John (65) enrolls in Medicare effective 2/1/25. He and wife Melissa remain covered under Employer’s group health plan. John terminates employment 6/26/25 (within 18 months of his Medicare entitlement), his coverage ends 6/30/25. John and Melissa elect COBRA effective 7/1/25.

• John is entitled to 18 months of COBRA beginning 7/1/25.
• Melissa is entitled to 31 months of COBRA beginning 7/1/25 (the remainder of 36 months since 2/1/25 when John became entitled to Medicare).

COBRA & Medicare: Election Timing

Medicare entitlement before COBRA election: If a covered employee (or another qualified beneficiary) becomes entitled to Medicare before electing COBRA, the employer remains obligated to extend an offer of COBRA to the qualified beneficiary.

Example John (65) becomes entitled to Medicare on 2/1/25. On 6/1/25 John terminates employment with Employer and experiences a COBRA qualifying event. Employer must offer John COBRA.

COBRA election before Medicare entitlement: If a qualified beneficiary elects COBRA and then at some point during their continuation coverage period becomes entitled to Medicare, the plan can terminate the COBRA coverage early. However, this will not impact the COBRA coverage of any qualified beneficiary who is not entitled to Medicare.

Example John (64) terminates employment with Employer on 6/8/25 and elects COBRA effective 7/1/25 for himself and his spouse, Melissa (60). On 9/1/25 John turns 65 and becomes entitled to Medicare. Employer may terminate John’s COBRA coverage early upon John becoming entitled to Medicare. However, Melissa, who is not yet entitled to Medicare, must be allowed to continue her COBRA coverage for the remainder of the continuation coverage period unless she also becomes entitled to Medicare.

Medicare Part D Creditable Coverage

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 who are eligible for the employer’s group health plan. The creditable (or non-creditable) notice is required to be distributed upon initial eligibility and annually, as well as upon a change in creditable status or plan termination. 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 mid-plan year or if the plan is terminated during the year.

Who Are Part D Eligible Individuals?

Individuals are considered “Part D eligible” if they are enrolled in either Medicare Part A or Part B and 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 more common approach is to provide the disclosure to everyone who is eligible to enroll in its prescription drug plan (regardless of whether they are Part D eligible).

What is Creditable Coverage and Why Does It Matter?

Prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of standard prescription drug coverage under Medicare Part D. Often the carrier or administrator will indicate whether a plan’s drug coverage is creditable. Otherwise, the employer must make the determination using CMS’ simplified method or by obtaining an actuarial determination. 

An employer is not required to offer a creditable plan but is required to determine whether its prescription drug coverage is creditable and disclose its status to eligible individuals and to CMS. Individuals who are eligible for the employer-sponsored plan and Medicare Part D simultaneously need this information to determine when to enroll in Medicare Part D. 

Medicare & Health Savings Accounts (HSAs)

Medicare Entitlement (Not Eligibility) Interferes with HSA-Eligibility

Many employees who reach age 65 are eligible for high-deductible health plans (HDHPs) through employment and have the option to make or receive HSA contributions. Medicare is “impermissible other coverage” for purposes of HSA eligibility. Merely being eligible for Medicare doesn’t matter, but once a person is entitled to (not just eligible for) any part of Medicare, that person is not eligible to make 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. Medicare entitlement will generally not impact whether the individual remains eligible for the HDHP.

Delaying Medicare Entitlement to Preserve HSA-Eligibility

Enrollment in Medicare is automatic in some circumstances (e.g., if an individual turns 65 and is already collecting social security benefits), but otherwise individuals could delay Medicare enrollment beyond initial eligibility. If an individual delays Medicare enrollment, is enrolled in a qualifying HDHP, and does not have any other impermissible coverage, then the individual could continue contributing to an HSA. But keep in mind that upon enrolling in Medicare, the effective date may be retroactive up to 6 months. For this reason, it’s important to carefully calculate the pro rata contribution limit and contribute accordingly. Individuals can contribute up to 1/12 of the annual contribution limit for each month of HSA eligibility and such contributions can be made any time during the applicable calendar year up until April 15th (an individual’s tax filing deadline) of the following year.

Family Members’ Medicare Entitlement Does Not Impact HSA-Eligibility

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 employee’s ability to establish or maintain and contribute to an HSA if the employee is otherwise eligible to do so. And funds from an employee’s HSA may be used to reimburse the qualifying medical expenses of a spouse who is not HSA eligible. This 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.

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

Employers often wonder whether they can 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.

Permitted 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 and are not available to employers subject to the MSP rules. In other words, the exception is generally only available to employers with <20 employees.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

Employers may offer an individual coverage HRA (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.

Medicare Entitlement and §125 Cafeteria Plan Election Changes

An employee’s Medicare entitlement (or loss of Medicare eligibility) are events that permit a mid-year election change for 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.

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