What Employers Need to Know About Medicare-Eligible Employees

Employers are allowed to educate Medicare-eligible employees about their options—but must avoid any practices that could be seen as encouraging them to drop employer-sponsored coverage in favor of Medicare. Doing so could raise compliance concerns and unintended legal risks.

Like many government programs, Medicare can be complex and confusing, especially for those unfamiliar with its rules and timelines. To help you navigate this topic, we’ve answered some of the most frequently asked questions from employers managing Medicare-eligible team members:

What Is Medicare?
Medicare is a federally funded health insurance program primarily for individuals aged 65 and older. Americans become eligible to enroll in Medicare starting three months before their 65th birthday. Some individuals with qualifying medical conditions may be eligible earlier.

What Does Medicare Cover?
Medicare has several parts, each covering different services:

Part A– Hospital Insurance: Covers inpatient hospital stays, skilled nursing facility care, hospice, and some home health care. Most people don’t pay a premium for Part A.
Part B – Medical Insurance: Covers doctor visits, outpatient care, preventive services, and some home health care.

How Do Medicare Claims Work?
Medicare operates under a primary vs. secondary payer system. This determines whether Medicare or an employer health plan pays first when someone is covered by both.

Medicare is the Primary Payer when:
• The employer has fewer than 20 employees
• The individual is on retiree or COBRA coverage, regardless of employer size

The Group Health Plan is the Primary Payer when:
• The individual is actively employed (or covered through a spouse’s current employment)
• The employer has 20 or more employees

When Medicare is the primary payer, enrollment in Medicare Parts A and B is generally required for full coordination of benefits.

When the employer plan is the primary payer, employers cannot require employees to enroll in Medicare and must offer the same benefits to Medicare-eligible employees as they do to those under age 65.


MEDICARE ADVANTAGE AND PRESCRIPTION DRUG COVERAGE

Medicare-eligible individuals may enroll in:
Part C (Medicare Advantage) within 2 months of losing group health coverage (active, retiree, or COBRA)
Part D (Prescription Drug Coverage) within the same 2-month window

In these cases, Medicare becomes the primary payer once coverage under the group health plan ends.

Can Employers Incentivize Employees to Move from a Company Plan to Medicare?
In short: No.

Under the Medicare Secondary Payer (MSP) rules, employers are prohibited from offering any financial or other incentives to encourage Medicare-eligible individuals to decline or drop employer-sponsored group health coverage if the employer plan would otherwise be the primary payer.

However, what is permitted—and strongly encouraged—is education.

Empower Through Education, Not Incentives
In some cases, Medicare may provide better value for eligible employees than their employer-sponsored coverage. Unfortunately, many employees are unaware of their eligibility or unsure how Medicare works. This is where education plays a critical role.

Providing clear, unbiased information about Medicare helps employees make informed decisions that suit their needs—without putting the employer at legal risk.

Employees who voluntarily opt for Medicare because they determine it's the better option (due to cost or coverage) can create win-win scenarios: improved health outcomes for them and potential cost savings for the employer.


Ways Employers Can Support Informed Choices:
• Distribute written Medicare resources as employees near age 65
• Invite a licensed Medicare specialist to speak during open enrollment or offer one-on-one consultations
• Refer employees to third-party Medicare experts for impartial guidance

Importantly, these educational efforts should be purely informational, with no pressure or encouragement to leave the employer plan.

When done right, Medicare education not only supports compliance—it strengthens your benefits strategy and demonstrates your commitment to employee wellbeing.


Can Employers Help Medicare-Enrolled Employees with Their Premiums?
Generally, no.

Employers are not allowed to assist Medicare-eligible employees with Medicare premium payments, as this would be considered a financial incentive to drop employer-sponsored coverage—a direct violation of Medicare Secondary Payer (MSP) rules and other federal regulations.


Are There Any Exceptions?
Yes—there are two specific exceptions:

1. ICHRAs (Individual Coverage Health Reimbursement Arrangements)
ICHRAs can legally reimburse employees for Medicare premiums if the employee is:
• Enrolled in Medicare Parts A and B, or C (Advantage)
• Not offered traditional group health coverage by the employer

ICHRAs must meet strict design and compliance standards, including nondiscrimination rules and a written plan document.

2. Small Employer Exception (Fewer Than 20 Employees)
Employers with fewer than 20 employees may reimburse Medicare premiums if:
• A group health plan is offered to all employees (other than just the reimbursement plan)
• The group health plan provides minimum value and is not limited to excepted benefits
• Only employees enrolled in Medicare Part A & B or Part D can receive the premium reimbursement
• Reimbursements are limited to:
Medicare Part B or D premiums
Excepted benefits, such as Medicare Supplement (Medigap) coverage

⚠️ Important: These arrangements must be properly integrated with a group health plan to remain compliant.

While the rules are strict, compliant solutions do exist—but they require careful structuring. Employers should consult with legal and benefits experts before implementing any Medicare-related reimbursement strategies.


CAN EMPLOYERS OFFER A TAXABLE “CASH-OUT” OPTION FOR EMPLOYEES ELIGIBLE FOR MEDICARE?
Yes—with important conditions.

Employers may offer a taxable cash-out option to employees who waive group health coverage—but only if the option is available equally to all employees, regardless of Medicare eligibility.

Permissible Under a Bona Fide Cafeteria Plan
When structured under a compliant cafeteria plan (under IRS Code §125), a cash-out option allows employees to decline employer-sponsored group health insurance in exchange for taxable compensation—if they are enrolled in other qualified coverage, such as:

• A spouse’s group health plan
• TRICARE
• Medicare

The cash-out option must be uniformly available to all employees. It cannot be targeted or structured specifically to encourage Medicare-eligible employees to opt out.

MSP Compliance and Legal Risk
The Medicare Secondary Payer (MSP) rules prohibit large employers (those with 20 or more employees) from offering any incentive for Medicare-eligible employees to decline employer coverage.

However, HHS has informally stated that a cafeteria plan with equal treatment for all employees does not violate MSP rules, so long as:
• Participation is truly voluntary
• The plan meets all IRS §125 requirements

Violating MSP rules can result in civil penalties up to $5,000 per violation.

BOTTOM LINE:
A taxable cash-out option can be compliant when:
• It's offered through a bona fide §125 cafeteria plan
• It treats all employees equally, regardless of Medicare status
• It's evaluated for potential ACA affordability impact
• Legal and compliance advisors are consulted before implementation