March 20, 2018
The interaction between Medicare and COBRA can be a minefield for employers and former employees alike. This article provides a brief overview of how these two bodies of law interact and some potential pitfalls.
COBRA Enrollment and Medicare. Under the COBRA rules, an individual (employee, spouse, or dependent) on COBRA who enrolls in Medicare can have his or her COBRA coverage terminated early on enrollment in Medicare. This applies to the individual who enrolls in Medicare, but not his or her family members, if they are also on COBRA.
This may seem harsh, but it is actually beneficial to the individual. Individuals who are eligible for Medicare, but continue COBRA coverage are subject to penalties for a late enrollment. Specifically, there are late enrollment penalties for Medicare Part B that continue for the rest of the individual’s life. This means the individual would continue to pay more for Part B than they would if they had enrolled in Part B on a timely basis. There are not late enrollment penalties if an individual has non-COBRA coverage as an active employee and enrolls shortly after that coverage ends.
Many individuals are unaware of these penalties when electing COBRA coverage for themselves or their spouses that will continue after age 65. For individuals who want more coverage than what Medicare provides, HUB has a comparison tool for Medicare Supplement Plans. HUB’s personal lines advisors can help individuals navigate these complexities and find a Medicare Supplement Plan that is right for them.
Legislation has been proposed that would allow seniors enrolled in COBRA coverage to transition to Medicare Part B without paying late enrollment penalties. This legislation would effectively treat COBRA as “creditable coverage,” the same as seniors who remain on similar employer-sponsored coverage and then enroll in Medicare. This one-time Medicare special enrollment period would only apply when COBRA expires. However, until this becomes law, employers with individuals on COBRA should consider letting employees know of the potential pitfalls of waiting to enroll.
Someone on Medicare has a COBRA Qualifying Event. Somewhat surprisingly, if an individual is already enrolled in Medicare while receiving employer-sponsored coverage, and then has a qualifying event entitling them to COBRA, they still have to be offered COBRA. Also, in this case, COBRA coverage cannot be terminated early because the individual is enrolled in Medicare.
However, an employee that enrolls in Medicare while an active employee can cause his spouse and dependents to have a longer COBRA period. This happens if the employee has a termination of employment or reduction in hours within 18 months after enrolling in Medicare. In that case, any spouse or dependents (but not the employee) can continue COBRA coverage for 36 months from when the employee became entitled to Medicare. Note that it is not 36 months from the termination of employment/reduction in hours, but from when the employee became entitled to Medicare.
Who Pays First? While not a COBRA administrative issue, employers and employees should also be aware of how benefits coordinate between COBRA and Medicare. Under the Medicare Secondary Payer rules, a group health plan for an active employee generally has to process and pay claims first and Medicare will pay secondary, if at all. However, for COBRA coverage, the opposite rule applies: Medicare pays first, and the COBRA coverage pays second. Employees, spouses, or dependents enrolled in Medicare should take this into account in deciding whether to elect COBRA.
Additionally, for COBRA participants, some plans pay as if the individual has elected Medicare, even if the individual is not enrolled. This can sometimes catch individuals by surprise, especially if they take a leave of absence (i.e. a reduction in hours) for a pre-planned medical procedure and elect COBRA assuming the plan will pay as if they were still an active employee. Medicare-eligible employees should make sure they understand how their plan will pay in that circumstance. Employers may want to advise them to discuss their options with the carrier.
Medicare is Not (Usually) a COBRA Trigger. There is also often misunderstanding about what happens if an active employee enrolls in Medicare. Except in rare cases (usually involving disability or end-stage renal disease), the employee enrolling in Medicare is not an event that lets spouses and dependents elect COBRA. This is because enrollment in Medicare does not usually result in a loss of employer coverage. A loss of employer coverage is necessary (but not enough by itself) to trigger a COBRA obligation. With very limited exceptions, it is a violation of Medicare Secondary Payer rules to cancel employer coverage when an individual becomes entitled to Medicare. Those rules can result in substantial penalties if they are violated.
Similarly, if an employee chooses to drop coverage voluntarily and enroll in Medicare, that is also not a COBRA qualifying event. Even though there is a loss of employer coverage, the loss is due to the employee’s choice to waive coverage and not automatically triggered by the terms of the plan.
A Couple of Notes. For our purposes in this article, we talk about being “enrolled” in Medicare, but Medicare itself (and articles discussing Medicare) confusingly use the term “entitlement” to refer to someone who is enrolled in Medicare. If you see the term “entitlement” as it relates to Medicare, that means “enrolled.” Being “eligible” for Medicare just means the person has the opportunity to enroll.
Additionally, when we talk about enrollment, we mean in either Part A (hospital insurance) or Part B (medical insurance) of Medicare. Either one is enough. A complete discussion of Medicare enrollment is outside the scope of this article, but note that there are circumstances where enrollment in Part A is automatic. However, Part B generally must be elected and there is often a premium that is due.
Finally, we have limited our discussion here to federal COBRA rules. State COBRA-like rules may also apply to insured plans, particularly those of employers with fewer than 20 employees who aren’t subject to federal COBRA.
Takeaway. The interaction between COBRA and Medicare is complex. Employers that have Medicare-eligible employees completing COBRA enrollment should make sure both they and their employees understand the potential implications of electing COBRA and how it will interact with Medicare.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.