Usually, if an employee has employer health plan coverage and is covered by Medicare, the employer plan pays the claim first. However, there are important exceptions to this rule, and some of them can jump up and surprise both employees and employers alike.
Medicare Background
Medicare rules typically prohibit employers from taking Medicare into account for employees in “current employment status” or their spouses. This means that, when the employer plan is primary (meaning it pays first), then Medicare will only pay the difference (if any) between what the employer plan paid and what Medicare would usually pay. Typically, Medicare does not pay much, if anything, in that scenario. On the other hand, if Medicare is primary (i.e. pays first), then the reverse applies: the employer plan typically pays the difference between Medicare’s payment and the employer plan’s standard reimbursement.
These rules generally apply to an employer with at least 20 employees that offers a group health plan. For this purpose, “current employment status” includes the obvious, but also includes the following scenarios where the employee is not actively working:
- The first six months that the employee is receiving disability benefits from the employer.
- If the employee retains reemployment rights and has not been terminated by the employer (if the employer provides the coverage) or has not had his or her union membership terminated (if the union provides the coverage). For this to apply, the employee can’t be on COBRA and the employee also can’t be receiving disability benefits from the employer for more than six months or from Social Security at all. This only typically applies in the union context or to individuals, like teachers, who do not have a 12-month schedule.
The rule does not directly address leaves of absence. However, leaves of absences are addressed in the Medicare Secondary Payer manual released by the Centers for Medicare & Medicaid Services (“CMS”). In Chapter 1, Section 50 of the CMS manual it says that an employee retains reemployment rights (the second bullet above), if the employee takes “an employer-approved temporary leave of absence for any reason.”
Additionally, how these rules play out in practice may vary depending on how the employee or spouse became eligible for Medicare. There are three basic ways for an employee to become eligible for Medicare:
- Reach 65
- Have a Disability
- Have End-Stage Renal Disease ( “ESRD,” i.e., kidney failure)
Who Pays First?
Below we walk through some common scenarios involving Medicare and employer plans and we say who pays first and why.
- Employee (age 65+, no disability or ESRD) has coverage and is currently working.
o Who pays first? Employer plan.
o Why? Employee is in current employment status.
- Former employee (age 65+ or receiving disability-based Medicare, but no ESRD) is on COBRA or has retiree health coverage.
o Who pays first? Medicare.
o Why? The employee is not in current employment status.
o HUB Note: COBRA is also not considered “creditable” coverage for Medicare enrollment purposes. That means a retiring employee who is eligible for Medicare, but elects COBRA and does not enroll in Medicare Part B, could have to pay a penalty for the rest of his or her time in Medicare. We discussed this in more detail in an earlier piece.
- Employee (age 65+, no ESRD and not receiving disability-based Medicare) is receiving disability benefits from the employer.
o Who pays first? Employer plan for the first six months, but Medicare after that.
o Why? The employee is in “current employment status” under the Medicare rules for the first six months of receiving disability benefits from the employer, even though they aren’t actually “working” due to the disability.
o HUB Note: In some cases, insurance policies automatically pay as if Medicare has been elected, even if the employee hasn’t enrolled in Medicare. This can be a trap for the unwary. Sometimes, employees who are over 65 go out on disability leave and don’t know how long they are going to be out. After 6 months, the employer plan stops paying as primary and the employee is left holding the bag if they haven’t elected Medicare. Employers may want to advise employees on disability leave to keep an eye on the calendar.
- Employee (age 65+, no disability or ESRD) goes on an employer-approved leave of absence (including FMLA and/or state leaves of absence, where applicable).
o Who pays first? Employer plan.
o Why? Because the leave is employer-approved, the employee is treated as being in “current employment status.”
o HUB Note: Employers should make sure they have a way to communicate with their insurance carriers or third-party administrators when employees go out on leave. If the carrier or TPA interprets an employee on leave as “terminated,” then the employer’s plan may incorrectly try to pay secondary. This can be particularly confusing if the leave is a disability leave and employers should work with their carriers on how that will be addressed.
- Employee’s spouse is receiving disability-based Medicare (regardless of age, no ESRD) and employee is working for the employer
o Who pays first? The employer plan only if the employer had at least 100 employees on half of its business days in the prior year. Otherwise, Medicare pays first.
o Why? This 100-employee rule is an exception to the 20-employee threshold described above.
- Employee’s spouse is receiving Medicare due to ESRD (regardless of age) and Employee is actively working for the employer or is receiving COBRA or retiree health coverage.
o Who pays first? The employer plan for the first 30 months; after that, Medicare pays first.
o Why? ESRD has its own special rules that require the employer plan to pay first for the initial 30 months, even if the employee is not in “current employment status.”
o HUB Note: Notice that these special rules apply even to COBRA or retiree coverage.
This is just a sampling of various situations. The conclusion in every instance will turn on the facts involved and the timing. These Medicare secondary payer rules are a complex area that goes well beyond simply figuring out which plan pays first. Employers should consult with experienced counsel in any situation involving these rules. Brokers who take the time to really understand and explain these complexities to their clients prove their true value.
Cory Jorbin is the West Region Chief Compliance Officer for insurance brokerage Hub International’s employee benefits practice. He provides day-to-day compliance support to account teams and clients of all sizes on ERISA, ACA, Cafeteria Plans, HIPAA, FMLA and related matters.
Find him on LinkedIn here: https://www.linkedin.com/in/coryjorbin/