Medicare premiums are a real cost for retirees. An HRA can pay them back tax-free.
A Medicare HRA reimburses the premiums a Medicare-eligible person pays: Part B, Part D, a Medicare supplement or a Medicare Advantage plan. For an employer that promised retiree health coverage, it is often the cleanest way to keep the promise without running a group plan for retirees.
Fund a dollar amount. Let the retiree pick the plan.
The employer decides how much to put in. The retiree chooses coverage in the individual Medicare market and submits the premium for reimbursement.
What It Reimburses
Medicare Part B and Part D premiums, Medicare supplement premiums and Medicare Advantage premiums are medical expenses that a plan can reimburse tax-free under Sections 105 and 213. Many plans also reimburse out-of-pocket costs such as deductibles and copays, as the plan document chooses.
Retiree-Only Plans Are Simpler
An HRA that covers fewer than two current employees, which includes a plan limited to retirees, is generally outside the Affordable Care Act’s market rules. That is why a retiree-only Medicare HRA is easy to design compared with an HRA for active employees.
Active Employees Over 65
An individual coverage HRA can also serve active employees on Medicare, where Medicare Parts A and B, or Part C, count as the individual coverage the account requires. This is a different design with different rules, and it has to be set up for the right employee class.
The Employer Sets the Budget
The account holds a set amount per retiree per year, so cost does not move with premium inflation or claims. For a plan sponsor reporting retiree obligations, a defined dollar amount is also far easier to measure than a promise of coverage.
It Has to Be Written Down
The plan document states who is eligible, how much they receive, what it reimburses, how claims are proven and whether unused amounts carry over. A retiree brochure that promises more than the document says is how retiree disputes begin.
Retirees Still Need Help Choosing
Moving from a group plan to the individual Medicare market is a real change for a retiree. Enrollment windows and late penalties apply, and a wrong choice can be hard to reverse, so the transition needs guidance, not just a deposit.
Three rules that decide whether it holds up.
Do Not Pay Active Employees to Leave the Group Plan
Federal law prohibits offering an incentive to a Medicare-eligible active employee not to enroll in the employer’s group plan, where that plan is primary. A Medicare HRA is for retirees, or for a class designed with counsel.
Check the Right to Change the Promise
Retiree health benefits do not vest automatically. What the plan documents reserve, and what retirees were told, decides whether the employer can move to a defined-dollar account.
Keep Reporting and Notices Current
A self-insured HRA has plan-document, notice and reporting duties, and Medicare Secondary Payer reporting can apply. See Medicare Secondary Payer reporting.
The questions employers ask about Medicare HRAs.
Six questions that come before the first deposit.
Which Medicare premiums can an HRA reimburse?
Part B, Part D, Medicare supplement and Medicare Advantage premiums are all medical expenses that a properly written HRA can reimburse. The plan document says which ones it covers.
Is the reimbursement taxable to the retiree?
Reimbursements of medical expenses under a valid HRA are generally not taxable income to the retiree. The employer deducts the cost as a business expense.
Do we have to offer it to everyone?
The plan has to be available on uniform terms to similarly situated retirees, and the nondiscrimination rules in Section 105(h) apply to self-insured plans. Different amounts by years of service or retirement date can work if they are consistent and written.
Can we use this for employees who are still working?
Only with a different design. An individual coverage HRA can reimburse active employees who are enrolled in Medicare. Offering an incentive to decline a primary group plan is prohibited, so the class needs to be set carefully.
What happens if the retiree dies or the amount runs out?
The plan document decides, including whether a surviving spouse is covered. These are the cases that reach an employer personally, so they are worth settling before anyone retires.
Does this replace a retiree group plan?
It can. Many employers move from a retiree group plan to a funded Medicare HRA so the cost is fixed, and the retirees buy coverage that fits them in the individual market.
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General information about Medicare HRAs, not legal or tax advice. Plan-specific questions belong with your tax adviser or counsel, and we will bring them in.
Related guides.
Medicare-Eligible Retiree Coverage
How coverage works once retirees reach Medicare.
Medicare Coordination Guidance
Who pays first when Medicare and an employer plan overlap.
Retiree HRAs for Public Employers
How public employers fund retiree health with HRAs.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
Medicare Secondary Payer Rules (42 U.S.C. 1395y)
Who pays first, and the ban on incentives to decline a primary group plan.
Employer Reimbursement of Medical Care (26 U.S.C. 105)
The rule that excludes employer-paid medical reimbursements from income.
Medical Expense Definition (26 U.S.C. 213)
What counts as medical care, including Medicare premiums.
Send us your renewal.
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The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents, two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
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