This blog is Part II of a three-part series.
In this series, we’re going to get into the weeds on the various options available to employers to coordinate their benefit plans with Medicare.
Part 2: Options for the 2-49 employee company
In the olden days, back in 2002, there were “Health Savings Accounts”, but those weren’t terribly useful to Medicare-eligible employees, because their very eligibility for Medicare prevented them from contributing anything to them. Then, there were “Premium Reimbursement Plans”, but those were “Cafeteria Plans”, which carried all of the regulatory baggage that Section 125 of the Internal Revenue Code loaded upon them.
Then, in 2002, the IRS authorized “Health Reimbursement Arrangements” (HRA’s), which:
- Are funded solely by employer contributions, without any cafeteria plan-style pretax salary reduction or election;
- Reimburse employees, spouses, or dependents for medical expenses, including premiums; and
- Provide reimbursements up to a maximum amount for a coverage period. Any unused monies at the end of the coverage period are carried forward to increase the maximum reimbursement amount in a subsequent coverage period.
Basically, HRA’s benefit from some of the features of Flexible Spending Accounts, but without some of hazards of cafeteria plans.[1] Thus, HRA reimbursements are not considered to be “taxable income” when used to pay insurance premiums, but unused reimbursement amounts can be rolled over from year to year.
In order for an HRA arrangement to be cost-effective for employers with a fully-insured plan, however, it should be paired with a plan whose deductible is high enough to allow the employer to benefit from sufficiently-lowered premiums.
The 2-19-Employee Company
Gosh, we’re slicing this pie awfully fine, aren’t we? Well, there’s a reason. For employers with fewer than 20 employees, the Medicare Secondary Payor Rules work in their favor – if an employee is covered by both an employer-provided group health plan and Medicare, Medicare is the “primary payor” for any medical expenses incurred by the employee. That’s great for the employer, but the employee is still on the hook for those Medicare premiums, which are not insubstantial. But, where there’s a will, there’s (usually) a way, and the “under-20-employee” employer has essentially four options available to reimburse its employees for their Medicare premiums.
Stand-Alone HRA’s
As the English say, this is just what it says on the tin. Employers with fewer than 50 employees need not offer group health insurance at all, but if they do, the law requires them to offer active employees aged 65 or older the same coverage that it offers to its younger workers. This includes the requirement that it offer employees with Medicare-eligible spouses the same spousal benefit coverage that is offered to employees with non-Medicare-eligible spouses.
Thus, an employer may reimburse Medicare premiums if:
- The employer offers a group health plan that meets ACA minimum value requirements;
- The employee is actually enrolled in Medicare parts A and B;
- The reimbursement payment is available only to the employees who are enrolled in Medicare part A and B or part D; and
- The payment is limited to reimbursement of Medicare B or D premiums and excepted benefits (e.g. medical out of pocket expenses, Medigap premiums).
As for how to implement such a policy, American Health Resources offers the following:
- Set the employer portion of health insurance premiums for all employees at specific dollar amount for each tier of coverage, instead of a percentage of premium. For example, set the employer contribution at $250 for single, $500 for employee + children, $750 for employee + spouse, $1,000 for family. Age-banding is allowed. The employee portion should be greater than Medicare premiums.
- Allow Medicare eligible employees to choose between that contribution, or a HRA equal to the same amount. They cannot, however, choose cash in lieu of those HRA payments, and must be enrolled in Medicare Parts A and B to participate.
Done properly, this should reduce costs for both employer and employee, given that Medicare premiums and Medigap or Part D policies are generally much less expensive than group health premiums for the over-65 crowd.
The 2-49-Employee Company
The above stand-alone arrangement is only available to employers employing fewer than 20 employees by virtue of the Medicare Secondary Payor Rules. For those in the 20-49 employee range, their options are limited to an integrated HRA, a Qualified Small Employer HRA, or an Individual Coverage HRA.
QSEHRA’s
One of the significant features of the QSEHRA is that an employer cannot offer a traditional group health plan alongside it. Instead, under the Cures Act, passed in 2016, the requirements for a QSEHRA are that it:
- Be funded entirely by the employer, reimbursements being capped at $5,300 for individual and $10,700 for family coverage (Funds contributed to a QSEHRA revert to the employer at the end of the plan year);
- Offer equal contributions and terms for all eligible employees; and
- Reimburse allowable medical expenses as defined by the IRS for employees and eligible family members.
A QSEHRA must be offered on the same terms to all eligible employees[2], except that benefits can vary based on the age of the individual or variations in the cost of individual health coverage. And while a QSEHRA need not be limited to a premium-reimbursement arrangement, if it is, it would still be treated as being offered “on the same terms”, even if there exists a variation in premiums based on age and family size.
Initial indications from employers regarding QSEHRA look promising. For the 2017 tax year, the average monthly QSEHRA employer contribution amounts were 38 percent smaller than the average small-employer contributions to group premium plans for single coverage, and 47 percent smaller than the average small-employer contributions for family coverage.
Also of note, small employers offering a QSEHRA in 2017 contributed a monthly average of $280.20 per employee with self-only coverage and $476.56 per employee with family coverage, versus small business offering group health coverage, which spent an average of $454.67 per employee per month for single coverage and $900.08 for family coverage, according to the 2017 Employer Health Benefits Survey conducted by the nonprofit Kaiser Family Foundation.
[1] Yes, there are “nondiscrimination” rules, but they aren’t quite so onerous as those faced by Section 125 Cafeteria Plans, and they don’t apply to arrangements which only reimburse employee-paid premiums. For example, the definition of “highly compensated” under section 105(h) is broader than the definition used for cafeteria plans (and qualified retirement plans). Under section 105(h), highly compensated individuals include the top 5 officers, 10% shareholders, and the top 25% of non-excludable employees ranked by compensation.
[2] Employees that may be excluded from eligibility are those having been employed fewer than 90 days, employees younger than 25, part-time and seasonal employees, union employees, and non-resident aliens with no US-source income.
