The employer has over 100 employees and some are eligible for Medicare. May an employer pay some or all of an employee's (or spouse's) premiums for a Medicare supplement plan?

If the employer has 20 or more employees, the answer is no. This practice is prohibited by the Medicare Secondary Payer (MSP) regulations. So, due to the MSP regulations, this employer should not pay any portion of the premium for the Medicare supplement plan for any active employees or their spouses.

There are two relevant guidelines under the MSP regulations. The first prohibits an employer with 20 or more employees from taking an individual’s age-based Medicare status into consideration.

As 42 USC 1395y (b)(1)(A)(i) states:

A group health plan may not take into account that an individual (or the individual's spouse) who is covered under the plan by virtue of 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.

To summarize, employees and spouses who are eligible for Medicare due to age must be eligible under the same terms and conditions as employees and spouses that are under age 65.

The second guideline prohibits an employer – again, with 20 or more employees – from providing a financial incentive for a Medicare eligible individual to not enroll or terminate group coverage making Medicare primary.

According to 42 USC 1395y (b)(3)(C):

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 (as defined in paragraph (2)(A)).

Reimbursing an employee for the cost of Medicare or supplement plan premiums would most likely be considered a financial incentive for the employee or spouse to drop group coverage, making Medicare primary. Further, CMS explicitly states on page six of the CMS Instruction Booklet for IRS/SSA/CMS Data Match that an employer must not subsidize, purchase, or be involved in the arrangement of an individual supplement policy for the employee or family member.”

In summary, an employer with 20 or more employees should not reimburse employees or spouses for the cost of Medicare or supplement plan premiums. To do so would put the employer at risk for violation of the MSP Regulations. The employer should not take the employees' or spouses' Medicare status into consideration and should offer them the same benefit options that are available to other employees and spouses.

A noncompliant employer would be subject to a $5,000 civil penalty per violation, legal action and liability for damages, and excise tax penalties.