Medicare and Employer Plans: Coordination, MSP Rules, and Retiree Coverage

Medicare Secondary Payer: The Basic Rules

The Medicare Secondary Payer rules establish which payer — Medicare or the employer's group health plan — pays first when a person is covered by both. The rules vary based on the reason for Medicare eligibility and the size of the employer.

The MSP Anti-Incentive Rule

One of the most important — and most frequently violated — MSP rules is the prohibition on offering incentives for Medicare-eligible active employees to drop group health coverage and enroll in Medicare as their primary coverage.

• Prohibited incentives include: cash payments, additional benefits, or any other inducement offered to Medicare-eligible employees to drop group coverage.
• The prohibition applies to both direct and indirect incentives — including HRA contributions conditioned on Medicare enrollment.
• Penalties: Violations of the MSP anti-incentive rule carry civil monetary penalties of up to $10,000 per violation, plus potential Medicare overpayment liability.
• Common violation: Some employers offer Medicare-eligible employees a "buyout" — a cash payment or HRA contribution — to encourage them to drop group coverage and enroll in Medicare. This is a clear MSP violation.
• ICHRA and MSP: An ICHRA offered to Medicare-eligible active employees must be carefully structured to avoid MSP violations. The ICHRA cannot be conditioned on Medicare enrollment.

Medicare Part D Creditable Coverage

Employers with group health plans that include prescription drug coverage must annually notify Medicare-eligible plan participants whether the plan's drug coverage is "creditable" — meaning it is at least as good as standard Medicare Part D coverage.

• Creditable coverage determination: The plan's actuary or TPA must perform an actuarial equivalence test annually to determine whether the drug coverage is creditable.
• Notice timing: The creditable coverage notice must be provided to Medicare-eligible participants before October 15 each year (the start of Medicare's annual enrollment period) and at other specified times.
• CMS disclosure: Employers must also disclose creditable coverage status to CMS annually using the online disclosure form.
• Importance to employees: Employees who delay Medicare Part D enrollment while covered by creditable employer coverage do not face a late enrollment penalty. Employees who delay enrollment while covered by non-creditable coverage do face a penalty.
• Most self-funded plans are creditable: Most employer-sponsored drug plans are creditable because they cover a broad formulary with low cost-sharing. However, HDHPs with high deductibles may not be creditable — verify annually.

Retiree Health Coverage and Medicare

Employers who offer retiree health coverage must understand how Medicare coordinates with the retiree plan. The rules are different from active employee coverage:

• Medicare is primary for retirees: Unlike active employees at large employers, Medicare is the primary payer for retirees who are Medicare-eligible. The employer's retiree plan is secondary.
• Medicare supplement (Medigap) design: Many retiree health plans are designed as Medicare supplements — covering the gaps in Medicare coverage (deductibles, coinsurance, and non-covered services).
• Medicare Advantage coordination: Some employers contract with Medicare Advantage plans for retiree coverage — the MA plan replaces both Medicare and the employer's retiree plan.
• Retiree drug subsidy (RDS): Employers with creditable retiree drug coverage can receive a federal subsidy (28% of qualifying drug costs) through the Retiree Drug Subsidy program.
• EGWP: An Employer Group Waiver Plan (EGWP) is a Medicare Part D plan customized for employer retiree populations — often more cost-effective than the RDS for large retiree populations.

Practical Compliance Steps

Medicare coordination compliance requires annual attention to several specific obligations:

• Identify Medicare-eligible active employees: Maintain a process for identifying employees who turn 65 or become Medicare-eligible due to disability or ESRD.
• Verify MSP primary/secondary status: Confirm the correct primary/secondary payer designation for each Medicare-eligible active employee based on employer size and eligibility reason.
• Annual creditable coverage notice: Distribute the creditable coverage notice to all Medicare-eligible participants before October 15 each year.
• CMS online disclosure: Complete the annual CMS creditable coverage disclosure by the required deadline.
• Review incentive programs: Audit any wellness incentives, HRA contributions, or other programs that could be construed as incentives for Medicare-eligible employees to drop group coverage.
• COBRA and Medicare: Notify COBRA participants who become Medicare-eligible that Medicare is primary — and that COBRA coverage may be terminated in some circumstances.