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Can we just force Medicare-aged participants off the plan?

Updated: Apr 21, 2023

The Medicare Secondary Payer rules (MSP) prohibit an employer with 20 or more employees from excluding an employee or spouse age 65 or older from the group health plan. These same rules also prohibit using or financial incentives that encourage these individuals to drop group coverage to take Medicare. Employers with less than 20 employees would NOT be subject to the MSP rules for age-based Medicare.

There are two relevant guidelines under the MSP rules:

  • The first prohibits an employer with 20 or more employees from taking an individual’s age-based Medicare status into consideration.

Those rules state: "A group health plan may not take into account that an individual (or the individual's spouse) who is Covered under the plan by the individual's current employment status with an employer is entitled to benefits under this subchapter under section 426(a) of this title, and shall provide that any individual age 65 or older (and the spouse age 65 or older of any individual) who has current employment status with an employer shall be entitled to the same benefits under the plan under the same conditions as any such individual (or spouse) under age 65." (see 42 USC 1395y (b)(1)(A)(i)).

This means that employees and spouses who are eligible for Medicare upon turning 65 must be eligible under the same terms and conditions as active employees and spouses who are under age 65. They can’t be excluded from the plan, which includes the employee and the spouse.

  • The second MSP guideline prohibits an employer, again with 20 or more employees, from offering a financial incentive for a Medicare-eligible individual to not enroll or terminate group coverage, which would make Medicare primary.

Those rules state: "It is unlawful for an employer or other entity to offer any financial or other incentive for an individual entitled to benefits under this subchapter not to enroll (or to terminate enrollment) under a group health plan or a large group health plan which would (in the case of such enrollment) be a primary plan.” (42 USC 1395y (b)(3)(C))

Reimbursing an employee for the cost of Medicare or supplement premiums would most likely be considered a financial incentive for the employee or spouse to drop group coverage, making Medicare primary, which is a violation of the MSP rules. An employee could voluntarily drop employer group coverage (e.g., because it’s more expensive) and rely on Medicare as the primary and only payer of medical expenses.

CMS has said that if an employee chooses not to take their employer’s coverage, then the employer can offer the employee a plan that will pay for services Medicare does not cover (e.g. vision, dental, etc.). However, we have to look at the purpose of the MSP rules: to govern when a group health plan has to pay primary and secondary (mostly with the group plan paying primary so Medicare can pay less). Remember these rules aren't necessarily concerned with what is a better option for the employee. Instead, they are in place to minimize Medicare's payment of claims. CMS warns that an employer “can't offer…a plan that pays supplemental benefits for Medicare-covered services or pays for these benefits in any other way.” Also, according to CMS, the Medicare law is violated “every time a prohibited offer is made regardless of whether it is oral or in writing.” A violation of the prohibition on financial incentives can lead to civil penalties of up to $5,000 per violation.

Employers considering offering a financial incentive for setting up a Medicare supplemental plan for active employees and spouses age 65 or older, or even outright excluding those eligible for Medicare, will likely be in violation of the MSP rules.

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