Can an HRA pay Medicare premiums for employees?

Increasingly, employees working through the gap between Medicare and Social Security eligibility ask an employer to cover Medicare supplemental premiums in lieu of a traditional group health plan. Can a company’s HRA pay Medicare premiums for employees?

The official Social Security “retirement age” is rising thanks to the effects of the Social Security Amendments of 1983. By 2027, it will go to 67 years old. Plus, there is a bonus for people delaying their Social Security benefit – as much as 32% more for a person born in 1950 who begins taking their benefit at age 70.

Yet, the age to qualify for Medicare remains at 65 years old. This difference in eligibility age means more people are working while under Medicare coverage.

Increasingly, employees working through this gap ask if they can refuse an employer’s group health plan (GHP) and have their Medicare supplemental premiums reimbursed through the Health Reimbursement Arrangement (HRA) instead.   An employer needs to know when they can or cannot let the company’s HRA pay Medicare premiums in order to remain in compliance with Medicare rules, the Affordable Care Act (ACA) and tax laws.

Can an HRA pay Medicare premiums for employees?

For an employer-sponsored GHP with 20 or more employees, the answer is no. It is not permitted under Medicare Secondary Payer (MSP) rules.

IRS, ACA, and DOL Rules

At first, reading the rules for employer payment of premiums under the Internal Revenue Service, Affordable Care Act, and Department of Labor, there seems to be no prohibition against employers having an HRA pay Medicare premiums the traditional GHP premium. That’s as long as employers do not encourage or force employees to leave the GHP for Medicare (so that the employer can save money with lower premiums).

And there, the IRS refers employers to MSP rules.

Medicare Secondary Payer (MSP) Rules

MSP rules determine which coverage pays first when a person is covered by both Medicare and a GHP. The goal is to strike a balance to protect both small-group employers and Medicare.

To make this happen, MSP rules say that when an employer group is small (less than 20), Medicare is always the primary payer and private insurance always pays as secondary.

This helps prevent older employees becoming a burden to small employers by increasing the overall group premium. Since Medicare pays first, private insurers are less likely to raise the employer’s GHP premium when an employee turns 65.

Larger groups, however, are less likely to see GHP premiums impacted by one employee hitting an age milestone. Medicare’s priority then shifts to protecting Medicare funds.

MSP rules for employee groups of 20 or more say that private insurance is always the primary payer while Medicare is always the secondary payer.

Shifting the burden

When an employer allows an employee to refuse the employer-sponsored GHP so that the employer may then pay the employee’s Medicare premiums, the GHP disappears as primary payer. The result is shifting the burden of primary payer to Medicare in the absence of other coverage.

This is not an issue with small groups because Medicare is always the primary payer for eligible employees in groups of fewer than 20 employees.

For groups of 20+ employees, however, making Medicare the primary payer where it was not, has the potential to move a tremendous burden onto Medicare.

That is why letting a company’s HRA pay Medicare premiums is not allowed for larger employee groups.

Which parts of Medicare premiums should an employer reimburse?

Premiums for Medicare part B (supplemental medical) and the part D prescription coverage are deductible medical expenses.

Medicare part A is not a deductible medical expense (with an exception for individuals not covered under social security; ref. Publication 502, page 9).

Disclaimer: The information in this blog post is not meant as legal or tax advice. Core Documents and our staff are not attorneys or tax professionals; nor are we a part of the IRS or any governmental entity. The reader should consult with an attorney, accountant, or an appropriate government agency for answers based or their professional knowledge and the reader’s particular situation.