Medicare at 65: Key decision points for employees and retirees

Question: What are the primary Medicare decision points for employees and retirees after reaching age 65?

Short answer: In most cases, employees at age 65 have the option to remain in active coverage, enroll in Medicare, or both. Most age 65+ retirees should enroll in Medicare immediately upon retirement to avoid potential coverage gaps and late enrollment penalties.

The basics: Medicare eligibility, enrollment and resources

Individuals generally become eligible for Medicare at age 65. Earlier eligibility may occur based on disability, ALS, or end-stage renal disease. CMS data highlights that approximately 90% of Medicare beneficiaries are age 65 and over.

Medicare offers three primary enrollment windows:

• Initial Enrollment Period (IEP): A seven-month period around the 65th birthday.
• Special Enrollment Period (SEP): An eight-month window after active employer coverage ends. COBRA doesn't extend this SEP.
• General Enrollment Period (GEP): Runs from January 1 to March 31 each year, with coverage beginning the first day of the month after enrollment for individuals who didn’t sign up for Medicare when first eligible.

Employers should generally avoid providing individualized Medicare advice. In some cases, employers work with outside vendors to provide custom Medicare-related information and assistance. Otherwise, employers should consider directing employees to a variety of useful resources available to the public:

• Medicare & You Handbook
• Contact Medicare
• State Health Insurance Assistance Program (SHIP) Medicare Counseling
• Consumer Assistance Programs (CAPs)

For more details: Medicare for Employers Guide

Medicare options for age 65+ employees

In most cases, employees at age 65 can choose among employer-sponsored coverage, Medicare, or both. However, employees at small employers generally need to enroll in Medicare upon reaching age 65.

The Medicare Secondary Payer (MSP) rules drive decisions

The MSP rules for Medicare entitlement based on age (i.e., reaching age 65) apply to employers with 20 or more employees for each working day for at least 20 calendar weeks in either the current or preceding calendar year. In general, the MSP rules provide that the employer-sponsored group plan pays primary for any employee or spouse also enrolled in Medicare. The rules also prohibit the employer’s plan from taking into account the Medicare status of a current employee or spouse, meaning the plan must provide the same benefits under the same conditions to Medicare-eligible employees.

For more details:

• Medicare Secondary Payer Employer Size Requirements
• Coordination of Benefits for Health Plans

Employer subject to MSP rules (20+ employees): Multiple choices available

If the employer is subject to the MSP rules, age 65+ employees can delay Medicare enrollment by relying solely on the employer’s coverage as an employee and utilizing the Medicare SEP upon retirement. Employees also have the option to waive employer coverage and rely solely on Medicare, or to have dual coverage with the employer plan paying primary and Medicare paying secondary.

Employer not subject to MSP rules (under 20 employees): Enroll in Medicare

If the employer has fewer than 20 employees and therefore isn't subject to the MSP rules, employees generally should enroll in Medicare when first eligible during their IEP. In these situations, the employer’s plan can (and typically will) pay as if Medicare is the primary payer, even if the employee doesn't enroll in Medicare. As a result, delaying Medicare enrollment can leave the employee responsible for significant out-of-pocket costs. Employees may choose to rely solely on Medicare or to maintain both Medicare and employer coverage (with Medicare paying primary and the employer plan paying secondary).

HSA eligibility: An important factor for many age 65+ employees

Age 65+ employees enrolled in a high-deductible health plan (HDHP) may choose to delay Medicare enrollment until the SEP in retirement to maintain health savings account (HSA) eligibility. Enrollment in any part of Medicare (including the generally premium-free Part A hospital coverage) is disqualifying coverage that causes an individual to lose HSA eligibility. Employees who want to continue contributing to an HSA should therefore delay Medicare enrollment until retirement.

For more details:

• The HSA Eligibility Rules
• Go All the Way with HSA Guide

Summary of Medicare options for age 65+ employees

For more details: When Can I Sign Up for Medicare?

Issues with Medicare secondary payer status for employees: The CMS GHP Demand Letter

Section 111 of the SCHIP Extension Act of 2007 created reporting requirements to ensure proper administration of the MSP rules in employer-sponsored group health plans (GHPs). The information collected is used to identify and recover claim payments incorrectly made with Medicare as primary coverage where MSP rules require the GHP to be primary.

The CMS GHP Demand Letter informs the employer plan sponsor of a Medicare overpayment made for a participant in the employer’s GHP for which the GHP should have paid primary, and it demands repayment for that overpayment. CMS GHP Demand Letters are routine, and employers should expect to receive them periodically. These letters are primarily a carrier/TPA coordination of benefits issue, with heightened scrutiny because Medicare trust funds are adversely affected by the claims processing error.

Employers receiving a CMS GHP Demand Letter should work with the carrier or TPA to ensure the claims reprocessing/repayment is handled properly, or alternatively, to confirm that the letter was sent in error and dismissed pursuant to a valid defense. The carrier or TPA generally takes the lead in resolving the matter.

For more details:

• The Medicare CMS GHP Demand Letter
• Coordination of Benefits for Health Plans

Medicare options for age 65+ retirees

Employees who decline Medicare enrollment in the IEP upon reaching age 65 have the opportunity to enroll in Medicare upon retirement. These age 65+ employees generally need to enroll in Medicare immediately in the SEP upon the loss of active employer-sponsored coverage to avoid multiple serious potential issues.

Issue 1: The eight-month Medicare special enrollment period isn't extended by COBRA enrollment

Age 65+ Medicare-eligible employees generally qualify for an eight-month Medicare SEP upon retirement (or any termination of employment) that begins the earlier of the month after employment ends or the month after active coverage ends. COBRA (even where subsidized) doesn't extend this eight-month SEP because it isn't considered active coverage based on current employment status. Failure to enroll in Part B during the eight-month SEP based on loss of active coverage, regardless of COBRA enrollment, can therefore cause the inability to enroll in Part B until the GEP, which may cause a significant coverage gap.

Retirees who fail to enroll in Part B during the eight-month SEP may also be subject to a late enrollment penalty equal to 10% of the Part B premium for each full 12-month period they were eligible but didn't enroll. In most cases, this higher premium applies for as long as the individual remains enrolled in Part B.

Issue 2: COBRA generally pays secondary to Medicare (regardless of enrollment)

Age 65+ retirees should also avoid relying solely on COBRA because it may provide only secondary coverage. In general, the MSP rules require that the employer-sponsored group health plan always pay primary to Medicare for individuals in current employment status, which applies to active coverage.

Retirees enrolled in COBRA aren't receiving employer-sponsored coverage based on their current employment status. In the COBRA context where the MSP rules don't apply and Medicare is the primary payer, the employer plan can assume the Medicare payment rate and pay only as secondary coverage for any individual who's eligible for COBRA. This is true regardless of whether the individual is enrolled in Medicare.

For example, if an individual’s services would have been covered as primary by Medicare if the participant were enrolled in Part B, COBRA coverage may pay only the amount that a secondary plan would pay. For individuals not enrolled in Part B, that leaves the amount that would have been paid by Part B as a coverage gap for which the participant is responsible.

Issue 3: The COBRA/Medicare timing Geissal rule

Where a retiree seeks to maintain both COBRA and Medicare, COBRA can terminate early if the retiree enrolls in Medicare after electing COBRA. A retiree who enrolls in Medicare before electing COBRA isn't subject to early termination of COBRA caused by the Medicare enrollment. Retirees who want to both enroll in Medicare and remain on COBRA must be careful to enroll in Medicare before electing COBRA.

This timing rule stems from the 1998 U.S. Supreme Court case Geissal v. Moore Med. Corp., which is the only U.S. Supreme Court case to address COBRA rights. Since the U.S. Supreme Court’s ruling, the IRS has updated the COBRA regulations to confirm that only enrollment in Medicare after electing COBRA can cut short the qualified beneficiary’s COBRA rights (Treas. Reg. §54.4980B-7, Q/A-3).

For more details:

• Early Termination of COBRA Upon Enrollment in Medicare
• COBRA for Employers Guide

The Employer’s role in the SEP: Medicare Form CMS-L564

Retirees applying for Medicare Part B in the SEP will generally do so via Form CMS-40B either by paper (pdf or html) or online through the Social Security Administration. Medicare.gov includes a useful basic overview of this enrollment process on its Enrollment Forms site.

As part of the application process for the SEP, the age 65+ retiree must complete the Form CMS-L564 Request for Employment Information and provide it to the employer. The Form CMS-L564 is used for proof of group health plan coverage based on current employment (i.e., active coverage), which is needed to process the Medicare enrollment application.

The employer is responsible for completing Section B of the form with the following information:

1. Whether the individual was covered under the employer’s group health plan;
2. The date such coverage began;
3. Whether such coverage has ended;
4. The date such coverage ended; and
5. The timeframe that the employee worked for the company.

For more details: The Medicare Form CMS-L564 for Employers

Summary of options for age 65+ retirees

For more details:

• Medicare for Employers Guide
• When Can I Sign Up for Medicare?