Medicare and the Group Plan: Coordination of Benefits, HSA Eligibility, Part B
Ray, 68, is a full-time warehouse supervisor for a North Carolina manufacturer with 25 employees. He is enrolled in the company's fully insured PPO (individual deductible $1,500; out-of-pocket maximum $4,500) and, because he kept working past 65, he also has Medicare Part A and enrolled in Part B last year during a special enrollment period. The group plan's prescription drug coverage is creditable. Ray had a $30,000 hospital stay in March and his providers have asked which coverage to bill first. He also wants to open a health savings account before the tax deadline and contribute the family maximum, and his employer has offered to add $1,000 to it. Ray asks whether he should drop Part B now that he has workplace coverage.
1. Which payer is primary for the March hospital stay, and how would your answer change if the employer had 15 employees, or if Ray retired but kept the same group coverage?
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Group plan primary. The Medicare Secondary Payer working-aged rule makes the employer group health plan primary when the employer has 20 or more employees and the individual is covered based on current employment. With 25 employees, the PPO pays first and Medicare pays secondary. The hospital bills the group plan, and Medicare then considers the remaining balance - secondary Medicare generally pays no more than it would have paid as primary, less the primary payment, so Ray's $1,500 deductible and coinsurance are only partly offset.
15 employees: the 20-employee threshold fails, so the working-aged exception does not apply - Medicare becomes primary and the small group plan secondary. This is the single most commonly missed fact in this fact pattern: the employee's age is irrelevant; the employer's size controls.
Ray retires but keeps coverage: coverage is no longer based on current employment, so Medicare becomes primary regardless of employer size, and the group plan (or COBRA/retiree plan) pays secondary. Ray should also confirm whether retiree coverage is primary or a Medicare carve-out.
Practical point: Ray must actually be enrolled in Part B for it to pay secondary; the group plan cannot waive the deductible on the assumption Medicare will cover it.
2. Can Ray open and fund the HSA? Walk through eligibility, the employer's $1,000 offer, and what happens to contributions already made.
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No - Ray is not an eligible individual. HSA eligibility requires, among other things, that the person not be enrolled in Medicare. Enrollment in Part A counts, even premium-free Part A received automatically at 65. Being on Medicare disqualifies him for every month of that enrollment - the high-deductible plan alone cannot make him eligible.
Employer contribution: disallowed as well. An employer contribution to an ineligible employee's HSA is an excess contribution; the employer does not get a deduction and Ray faces the excise tax.
Excess contributions: any contributions made for months of Medicare enrollment (his and the employer's) are excess. To avoid the 6% excise tax, he must withdraw the excess plus attributable earnings by his tax filing deadline. Otherwise the 6% applies for each year the excess remains.
What he can still do: spend existing HSA balances tax-free on qualified medical expenses, including Medicare Part B, Part D, and Medicare Advantage premiums (but not Medigap premiums). Existing funds are not forfeited by Medicare enrollment.
Regaining eligibility would require disenrollment from Medicare, including Part A - generally impractical, and not something to recommend purely for HSA purposes.
3. Advise Ray on dropping Part B. Include the late-enrollment penalty mechanics and the Part D consideration.
Read the worked answer
He has a real choice, but a narrow one. Because Ray has group coverage based on current employment that is creditable, he may disenroll from Part B now and re-enroll later without a late-enrollment penalty using the special enrollment period - generally the 8-month window that begins when employment or the group coverage ends, whichever is first.
Why keeping Part B may still be right:
- The PPO carries a $1,500 deductible and $4,500 out-of-pocket maximum; secondary Part B materially reduces that exposure on a large claim.
- The premium is modest relative to the cost-sharing gap he would absorb alone.
Why dropping may be right: if cash flow is the issue and the group plan is genuinely comprehensive, the special enrollment period protects him - provided he re-enrolls on time.
The penalty risk: if he misses the special enrollment period and re-enrolls later, the Part B penalty is 10% of the standard premium for each full 12 months he was eligible but not enrolled, for as long as he has Part B. On a standard premium around $175, a three-year gap adds roughly $52 per month permanently. This is the trap: the penalty is triggered by a gap not covered by current-employment coverage, not by the disenrollment itself.
Part D: his group drug coverage is creditable, so no Part D penalty accrues while he is enrolled. He must not let a gap develop - if the group coverage ends, he has a limited window (generally 63 days) to enroll in a Part D or Medicare Advantage plan; the late penalty is 1% of the national base beneficiary premium per month of delay, permanent.