For employers shifting to an Individual Coverage Health Reimbursement Arrangement (ICHRA), this raises real questions. Compliance teams worry about Medicare Secondary Payer rules, anti-duplication provisions, and whether their employee classes hold up. Employees approaching retirement worry about something more personal: will they lose coverage or face a penalty once the switch happens?
This guide covers both sides: eligibility rules, what Medicare expenses an ICHRA can reimburse, employer compliance considerations, and how to decide between employer coverage and Medicare. Franklin Benefits Group advises small-business employers on ICHRA strategy and individuals on Medicare enrollment, which means our clients get guidance that accounts for both halves of this decision.
Key Takeaways
- ICHRA can reimburse Medicare Parts A, B, C, D, and Medigap premiums with the right enrollment combination.
- Employees need Parts A and B together, or Part C; Part B or D alone won't qualify.
- Employers can't build an ICHRA class around Medicare status; classes must follow job-based criteria.
- Losing group coverage triggers a Part B Special Enrollment Period with no late-enrollment penalty.
- Choose employer coverage or Medicare based on cost, network access, and household income.
ICHRA and Medicare 101: The Basics Refresher
Here’s a quick definition of each before you compare them.
An ICHRA is a tax-free, employer-funded allowance employees use to buy individual health insurance premiums, and sometimes other medical expenses. There's no cap on employer contributions, and eligibility is determined by employee classes, such as full-time, part-time, or salaried, rather than by health status.
Medicare has four parts, plus an optional supplement:
- Part A – hospital insurance
- Part B – medical insurance (doctor visits, outpatient care)
- Part C – Medicare Advantage (private plans bundling A, B, and often D)
- Part D – prescription drug coverage
- Medigap – supplemental coverage that fills gaps in Original Medicare
Medicare enrollment sits at roughly 70.3 million people nationwide, based on the latest CMS enrollment data. Many of those enrollees are still working.
When an employer with older staff adopts an ICHRA, employer benefits and Medicare start interacting in ways that catch HR teams and employees off guard. That overlap is where the compliance questions begin.
Can an ICHRA Reimburse Medicare Premiums? What's Covered
Yes, an ICHRA can reimburse Medicare premiums, provided the employee meets the plan's eligibility conditions. Reimbursable premium types include:
- Part A premiums (for those who owe them)
- Part B premiums
- Part C (Medicare Advantage) premiums
- Part D prescription drug premiums
- Medigap supplemental premiums
The 2019 final HRA regulations clarified that reimbursing Medicare premiums through an HRA does not violate the federal ban on duplicating Medicare benefits. The final rule published in the Federal Register permits ICHRA integration with Medicare Parts A and B together, or Part C, for plan years beginning in 2020.
Once that condition is met, the ICHRA can reimburse the premium types above without violating anti-duplication rules.
The Equal-Benefit Rule
An ICHRA can't be designed around what Medicare does or doesn't cover. Every employee within a class must receive the same allowance amount and terms, regardless of Medicare status. You can offer Medicare premium reimbursement, but you can't tailor the plan specifically because someone has Medicare.
Part D Is Reimbursable, But Not Enough On Its Own
Part D premiums are a reimbursable expense. But having Part D alone does not satisfy the ICHRA's minimum coverage requirement. An employee needs Part A and B together, or Part C, before any reimbursement, including Part D reimbursement, can start.
The Creditable Coverage Notice
If an ICHRA's own terms include prescription drug coverage or reimbursement, employers may need to issue a Medicare Part D creditable coverage notice. CMS requires this annually before October 15, at enrollment, and after certain plan changes.
Starting with 2026 plan years, CMS raised the simplified creditable-coverage test from 60% to 72% of expected drug costs covered, with a transition option available for that year only.
A Simple Example
Say an employer sets a $500-a-month ICHRA allowance for a class that includes a 66-year-old enrolled in Part A, Part B, and a Medigap plan. That employee's Part B premium ($202.90 for most beneficiaries in 2026) plus a typical Medigap premium (roughly $217 a month nationally) could largely fit within the allowance.
The employee submits substantiation monthly to confirm the expense.
Medicare Eligibility Requirements to Participate in an ICHRA
The core rule catches a lot of near-retirees off guard: employees need Part A and Part B together, or Part C, to participate in an ICHRA.
Part B alone doesn't count as minimum essential coverage for this purpose. Neither does Part A by itself, even though Part A alone satisfies general ACA minimum essential coverage rules elsewhere.
The Common Transition Gap
Most employees on a group health plan only enroll in Part A once they turn 65. It's premium-free for most people, so there's little reason to add Part B while still covered at work. That works until the employer shifts to an ICHRA. Suddenly that employee has a gap: Part A alone isn't sufficient for ICHRA reimbursements, and Part B enrollment takes time to process.
The Part B Special Enrollment Period
Losing group coverage triggers a Special Enrollment Period (SEP) for Part B. Employees who delayed Part B while covered by an employer plan tied to current employment can enroll:
- While that group coverage continues, or
- During the 8-month window that starts once employment or group coverage ends, whichever comes first
Months covered by an active-employment group plan don't count against the late-enrollment penalty calculation. Employees who move quickly through this SEP shouldn't face a Part B surcharge for the delay.
Substantiation Requirements
Employers can't just take an employee's word for Medicare enrollment. The rules require:
- Initial substantiation – proof of enrollment before the plan year begins, or before reimbursements start
- Ongoing substantiation – proof for each month a reimbursement is claimed, not just a one-time check at signup
This is more administratively demanding than a typical group plan, which is one reason many employers lean on a broker or administrator to track it.
Spouses and Dependents
Eligibility checks don't stop with the employee. Spouses and dependents of a Medicare-eligible employee can use individual marketplace coverage instead of Medicare. Their ICHRA reimbursement eligibility is verified separately from the employee's Medicare enrollment, which matters for two-income households or couples with an age gap.
Employer Compliance Rules: Classes, MSP, and Anti-Duplication
Medicare Status Isn't a Permissible Class
Employers can't build an ICHRA class based on Medicare eligibility or enrollment status. Permissible classes are job-based:
- Full-time vs. part-time
- Salaried vs. hourly
- Seasonal employees
- Employees in a waiting period
- Geographic location (same rating area)
- Collective bargaining unit membership
Classes can be combined, but Medicare status never becomes the defining line. If a class includes both Medicare-eligible and non-eligible employees, everyone in that class gets the same ICHRA terms.
Medicare Secondary Payer (MSP) Thresholds
MSP rules determine who pays first, and they hinge on group size and the reason for Medicare entitlement:
| Basis for Medicare | Employer Size | Primary Payer |
|---|---|---|
| Age 65+ | Fewer than 20 employees | Medicare |
| Age 65+ | 20 or more employees | Employer plan |
| Disability | Fewer than 100 employees | Medicare |
| Disability | 100 or more employees | Employer plan |
An ICHRA is still a group health plan for MSP purposes. The 2019 final rule allows ICHRA-Medicare integration whether or not MSP applies, but it does not exempt the ICHRA from MSP obligations.
If your ICHRA is subject to MSP, you can't limit reimbursements to only the expenses Medicare doesn't cover. That limit is a form of taking Medicare into account, and it collides with anti-duplication rules.
The Practical Risk
Picture a class of hourly warehouse staff that includes both a 45-year-old and a 67-year-old on Medicare. Both must receive identical ICHRA terms. Employers sometimes assume they can reduce contributions for Medicare-eligible staff since "Medicare picks up more." That assumption is exactly what the equal-benefit rule prohibits.
Anti-duplication means the ICHRA generally cannot be designed around Medicare—lower allowances, narrower reimbursable expenses, or Medicare-only limits inside a mixed class. Getting this wrong creates IRS or DOL exposure and can unwind the integration path that lets ICHRA and Medicare work together.
For employers with a wide age range in one workforce, class design is the usual failure point. A benefits advisor can catch those problems before they turn into audit findings.
Employer Coverage vs. Medicare: Which Should You Choose?
There's no universal answer here. It depends on contribution size, provider access, and who else is on the plan.
Start With Group Size
If your employer has 20 or more employees, the group plan is primary and Medicare is secondary. Staying on employer coverage while delaying Part B often makes financial sense, since you avoid paying two premiums for overlapping coverage.
If your employer has fewer than 20 employees, Medicare becomes primary once you're eligible. Staying on the employer plan alone, without also enrolling in Medicare, can leave major gaps, since the employer plan may pay little or nothing as secondary coverage.
Compare the Real Costs
National benchmarks help frame the decision, though actual costs vary by plan and region:
| Coverage Type | Approximate Monthly Cost (2026) |
|---|---|
| Medicare Part B (standard) | $202.90 |
| Average Medicare Advantage premium | $14.00 |
| Average Medigap premium | $217 |
| Average small-group employee family contribution | ~$741 ($8,889/year) |
Higher earners should also watch IRMAA surcharges. For 2026, individuals with modified adjusted gross income above $109,000 (or $218,000 for joint filers) pay more for Part B and Part D, up to $689.90 a month for Part B alone at the highest income tier, according to CMS.
That surcharge can flip the math for a household that assumed Medicare would automatically be cheaper.
Why This Decision Benefits From a Second Set of Eyes
We saw this play out with a Philadelphia-region manufacturing client whose workforce was aging into Medicare eligibility. After reviewing each employee's situation and moving eligible staff to appropriate Medicare coverage, results included:
- Employer plan costs dropped 15%
- Premiums held steady for three years
- Company received a $12,000 carrier refund
- No late-enrollment penalties for affected employees
Those results came from side-by-side comparisons, not guesswork. Franklin Benefits Group's team, including benefit specialist Robert Braun (Medicare and health coverage guidance since 2014), weighs group size, Medicare Secondary Payer (MSP) status, provider networks, and household income before anyone switches plans.
If you're weighing this decision for yourself or your workforce, run that comparison before open enrollment—not after.
Frequently Asked Questions
Is it better to go on Medicare or stay on employer insurance?
It depends on group size, premiums, network, and whether dependents stay on the plan. With 20+ employees, group coverage stays primary; with fewer, Medicare is primary. Compare your total costs side by side before you choose.
What is the income limit to avoid higher Medicare premiums?
For 2026, IRMAA surcharges apply once modified adjusted gross income exceeds $109,000 for individuals or $218,000 for joint filers, per CMS's published brackets. Income above those thresholds triggers higher Part B and Part D premiums on a sliding scale.
Can an ICHRA reimburse Medicare premiums for all parts of Medicare?
Yes. Parts A, B, C, D, and Medigap premiums are all reimbursable, provided the employee has Part A and B together, or Part C, to meet the ICHRA's minimum coverage requirement.
What happens if a Medicare-eligible employee only has Part A when transitioning to ICHRA?
They'll need to enroll in Part B through their Special Enrollment Period, which carries no late-enrollment penalty when used promptly. Reimbursements can't begin until Part A and Part B are both in place.
Can employees on Medicare receive different ICHRA benefits than younger employees?
No. Benefits must be equal within an employee class. Employers can't design different allowance amounts or terms based solely on Medicare status.
Do spouses of Medicare-eligible employees need to be on Medicare too?
No. Spouses and dependents can use individual marketplace coverage instead of Medicare, with their coverage verified separately for ICHRA reimbursement purposes.
