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Health Plan Rules for Employees with Medicare

As more and more older Americans stay in the workforce, employers may have questions about how employees’ Medicare entitlement impacts their group health plan coverage. Employers sponsoring group health plans that cover individuals enrolled in Medicare should understand:

  • Medicare’s coordination of benefits rules, which determine whether the group health plan or Medicare pays first on claims;

  • The Medicare secondary payer (MSP) rules, which prohibit many employers from taking into account an individual’s Medicare entitlement; and

  • The special continuation coverage rules under COBRA that apply to Medicare beneficiaries.

Retiree health plans are subject to more flexible rules that allow employers to implement Medicare carve-outs and similar plan designs.

Medicare Eligibility & Coverage Rules

Medicare is a federally funded health benefits program administered by the Centers for Medicare and Medicaid Services. Generally, Medicare is available for people age 65 or older, younger people with disabilities and people with end-stage renal disease (ESRD), permanent kidney failure requiring dialysis or a transplant.

Medicare’s eligibility rules work as follows:

Medicare has two main parts—Medicare Part A (hospital insurance) and Medicare Part B (physician and outpatient services). Medicare also offers prescription drug coverage (Medicare Part D) to everyone with Medicare. While most people do not have to pay premiums for Medicare Part A, Medicare beneficiaries are required to pay for their Part B and Part D coverage.

Coverage under Medicare Parts A and B typically begins automatically for individuals eligible for Medicare based on disability and for individuals eligible based on age who are already receiving monthly retirement benefits from Social Security or the RRB.

Individuals can drop Medicare Part B, but they are not permitted to waive Medicare Part A and retain Social Security benefits. If an individual who has already started receiving Social Security benefits waives Medicare Part A, he or she is responsible for refunding the Social Security payments already received, as well as any Medicare benefits paid on his or her behalf.

Individuals whose Medicare coverage does not begin automatically—that is, individuals who are not receiving retirement benefits from Social Security or the RRB at age 65 and individuals who are eligible for Medicare based on ESRD—must submit an application for Medicare benefits.

Coordinating Benefits

When individuals have Medicare coverage and other health coverage (for example, employer-sponsored health coverage), each type of coverage is called a “payer.” When there is more than one payer, Medicare’s coordination of benefits rules decide which payer pays first on a health care claim (that is, a health care provider’s bill).

The primary payer pays what it owes on a health care claim first. If the primary payer does not pay the health care claim in full, the claim is sent to the secondary payer to pay any remaining covered portion.

Key Point

When an individual has both Medicare and employer-sponsored health plan coverage, the payer status of each payer depends on a number of factors, including the reason for Medicare entitlement and, in some cases, the size of the employer.

The following chart summarizes Medicare’s coordination of benefits rules for employer-sponsored health plans.

MSP Rules for Employers

The Medicare Secondary Payer (MSP) rules include requirements for employers that sponsor group health plans that are primary to Medicare. These requirements are intended to protect Medicare’s secondary payer status.

Compliance Reminder

When an employer’s group health plan is primary to Medicare, the employer cannot terminate an employee’s eligibility for coverage when he or she becomes entitled to Medicare.

Employers with group health plans that are primary to Medicare must comply with the following requirements:

  • The group health plan must provide a current employee (or a current employee’s spouse) who is age 65 or older with the same benefits, under the same conditions, it provides employees and spouses under age 65;

  • The employer cannot offer Medicare beneficiaries any financial or other benefits as incentives not to enroll (or terminate enrollment) in a group health plan; and

  • The group health plan cannot take into account the Medicare entitlement of an individual.

Cannot “Take Into Account” Medicare Entitlement

Prohibited actions that “take into account” an individual’s Medicare entitlement include (but are not limited to) the following:

  • Offering coverage that is secondary to Medicare to individuals entitled to Medicare;

  • Terminating coverage because the individual has become entitled to Medicare (except as permitted for COBRA coverage);

  • Imposing limitations on benefits for an individual entitled to Medicare that do not apply to others enrolled in the plan, such as excluding benefits or charging higher deductibles;

  • Charging higher premiums to Medicare-entitled individuals;

  • Requiring Medicare-entitled individuals to wait longer for coverage to begin; Paying providers and suppliers no more than the Medicare payment rate for services furnished to a Medicare beneficiary, but making payments at a higher rate for the same services to an enrollee who is not entitled to Medicare;

  • Providing misleading or incomplete information that would induce a Medicare-entitled individual to reject the employer’s group health plan, which would make Medicare the primary payer; and

  • Refusing to enroll an individual for whom Medicare would be the secondary payer when enrollment is available to similarly situated individuals for whom Medicare would not be secondary payer.

Cannot Offer Incentives

When an employer’s group health plan is the primary payer, employers cannot discourage employees from enrolling in their group health plans. Also, employers cannot offer any financial or other incentive for an individual entitled to Medicare to not enroll (or terminate enrollment) in a group health plan that would pay primary.

A violation of the prohibition on offering incentives can trigger financial penalties of up to $8,908 (adjusted annually for inflation).

Click Here to read our full compliance overview about all of the rules for employees with Medicare.


This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

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