Can an Employer Pay for an Employee’s Medicare Supplement?
Navigate the complex regulations and discover compliant strategies for employers to support employees with Medicare Supplement costs, including tax considerations.
Medicare Supplement plans, often known as Medigap, are private health insurance designed to help cover out-of-pocket costs not paid by Original Medicare. These plans work alongside Medicare Parts A and B, assisting with expenses such as copayments, coinsurance, and deductibles. Many individuals with Original Medicare purchase a Medigap policy for more predictable healthcare costs. Employers often question their ability to assist employees with these supplement plans, as employer involvement is a nuanced area subject to specific regulatory frameworks and tax considerations.
Permissibility of Employer Payments
Employers face significant restrictions when directly paying for or reimbursing employees for individual health insurance premiums, including Medicare Supplement plans. The Affordable Care Act (ACA) market reforms generally prohibit “employer payment plans” unless they integrate with a group health plan or meet specific Health Reimbursement Arrangement (HRA) requirements. These employer payment plans typically fail to comply with ACA market reforms, such as the prohibition on annual limits and the requirement to cover preventive services without cost-sharing.
The Internal Revenue Service (IRS) has clarified that such arrangements cannot be integrated with individual market policies to satisfy ACA requirements. Employers operating non-compliant plans may incur substantial penalties. The excise tax penalty for non-compliance is $100 per day for each employee, amounting to $36,500 per year per employee. These regulations underscore why direct reimbursement for Medicare Supplement premiums is generally not permissible for most employers.
Compliant Employer Contribution Methods
Despite general prohibitions, employers can use specific, legally compliant mechanisms to help employees with Medicare Supplement premiums. Health Reimbursement Arrangements (HRAs) are the primary compliant vehicles for this purpose. An Individual Coverage HRA (ICHRA) allows employers to reimburse employees for individual health insurance premiums, including Medicare Supplement premiums, and other qualified medical expenses. Employees eligible for Medicare must have coverage under Medicare Part A and B, or Part C to qualify for ICHRA reimbursement.
ICHRAs allow employers to offer a defined contribution, letting employees purchase the Medicare Supplement plan that best fits their needs. Employees submit proof of payment for premiums and other eligible expenses for reimbursement through the HRA. This provides flexibility, offering employees choice while employers manage benefit costs. Employers can set different allowance amounts based on age, family size, or employee classes (e.g., full-time, part-time), provided certain conditions are met.
Another compliant option for smaller employers is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). QSEHRAs are designed for businesses with fewer than 50 full-time employees that do not offer a group health plan. Similar to ICHRAs, QSEHRAs allow employers to reimburse employees for medical expenses, including health insurance premiums, up to an annual maximum set by the IRS. For employees to receive tax-free reimbursements, they must be covered by a health insurance plan that provides minimum essential coverage (MEC).
Tax Treatment of Contributions
Employer contributions made through compliant HRAs, such as an Individual Coverage HRA (ICHRA), offer tax advantages for both employers and employees. For employers, contributions to an ICHRA are tax-deductible as a business expense, reducing the organization’s taxable income. They are also generally not subject to employer payroll taxes. This makes ICHRAs an attractive option for managing benefit costs.
For employees, reimbursements received through a structured ICHRA for Medicare Supplement premiums are typically tax-free. These reimbursements are not considered taxable income to the employee, provided they maintain minimum essential coverage (MEC), including Medicare Part A and B or Part C. If an employee does not maintain MEC, reimbursements would generally be considered taxable income. This tax-free status enhances the benefit’s value, effectively increasing net compensation without additional tax liability.
In contrast, direct, non-compliant payments or reimbursements outside a qualified HRA are generally considered taxable income to the employee. This subjects the amounts to income and payroll taxes for both the employee and the employer. The tax benefits of compliant HRAs underscore the importance of adhering to regulatory guidelines.
Important Considerations for Employers
Employers implementing an ICHRA for Medicare Supplement premiums should consider several practical aspects. Determining employee eligibility is a primary step, as only W-2 employees can participate. Employers can establish eligibility criteria by designating employee classes (e.g., full-time, part-time, geographic location). Employees must also have qualifying individual health insurance, including Medicare Parts A and B, or Part C.
Non-discrimination rules are another consideration, ensuring the HRA offering does not unfairly favor highly compensated individuals. While ICHRAs reimbursing only premiums may have exceptions, those reimbursing more typically need regular non-discrimination testing. Contributions can vary by age or family size, but age-based variations generally cannot exceed a 3:1 ratio between the oldest and youngest participants within a class.
The administrative burden of setting up and managing an HRA is also a factor. This includes establishing plan documents, processing claims, and fulfilling reporting requirements. Employers can utilize third-party administrators to manage these tasks, streamlining the process.
Employers should also consider how Medicare Supplement assistance interacts with existing employer-sponsored health plans. While an ICHRA can be offered alongside a traditional group health plan, it cannot be offered to the same class of employees; employees within a class must be offered one or the other. Due to regulatory and tax complexities, consulting with legal, tax, and benefits professionals is highly recommended to ensure compliance and optimal plan design.