Listen, we get it. Running a small business is like trying to change a tire on a car that's currently doing 70 mph on the turnpike. You’ve got payroll to manage, customers to keep happy, and somewhere in that pile of paperwork is a folder labeled "Medicare Secondary Payer (MSP) Rules" that looks about as appetizing as a week-old tuna sandwich.
But ignoring these rules isn’t just a bad idea; it’s a financial gamble you’re probably going to lose. The federal government has very specific ideas about who should pay for health insurance claims first, your company's plan or Medicare. If you get it wrong, the penalties aren’t just a slap on the wrist; they are "sell the company car" levels of expensive.
At Total Benefit Solutions Inc (www.totalbenefits.net), we spend our days navigating these shark-infested waters so you don’t have to. Here are the 15 things every small business owner and individual needs to know about Medicare Secondary Payer rules to stay on the right side of the law.
1. The "20 Employee" Threshold is Your Golden Rule
For most small businesses, the magic number is 20. If you have fewer than 20 employees, Medicare is generally the primary payer (the one who pays the bill first) for employees aged 65 and older. If you have 20 or more, your group health insurance for employers typically becomes the primary payer. This shift changes everything about how you manage your benefits.
2. Counting to 20 is Harder Than You Think
The IRS and CMS (Centers for Medicare & Medicaid Services) don’t just look at your head count today. They look at whether you had 20 or more full-time and/or part-time employees for at least 20 or more calendar weeks in the current or preceding calendar year. If you hit that mark, you’re stuck in the "large employer" category for the entire following year. (Pro tip: Yes, even the part-time college kid you hire for the summer counts toward that 20.)
3. The Payer Hierarchy (Who Pays First?)
Medicare Secondary Payer rules exist to ensure the government doesn't pay a dime until they’re sure no one else is responsible. When your plan is primary, it pays first, and Medicare pays second. When Medicare is primary (usually for companies under 20 employees), your plan pays only what Medicare doesn't cover. Getting this backwards is the quickest way to trigger an audit.
4. Multi-Employer Plan Traps
Are you part of an association or a multi-employer plan to get affordable group health insurance? Be careful. If even one employer in that group has more than 20 employees, the MSP rules might apply to everyone in the plan, regardless of their individual size. This is a common way small businesses accidentally fall under heavy compliance requirements without realizing it.
5. Disability is a Different Ballgame (The 100-Employee Rule)
If an employee is entitled to Medicare because of a disability rather than age, the rules change. In this case, the employer plan only becomes primary if you have 100 or more employees. (This is why having an advocate like Ed MacConnell on your side is vital, the rules change depending on why someone is on Medicare.)
6. The "No Incentive" Rule (Don't Bribe Your Employees)
It might be tempting to offer an employee a $500 bonus if they drop your company health plan and just use Medicare. Do not do this. Under MSP rules, you are strictly prohibited from offering any financial or other incentive (like a cash-out) for a Medicare-eligible individual to not enroll in your group plan.
7. The Penalty for "Bribing" is Eye-Watering
If you’re caught offering incentives to get people off your plan and onto Medicare, the civil money penalty is approximately $11,524 per violation (and yes, that number is indexed for inflation). That’s a very expensive "thank you" note to an employee.
8. You Cannot "Take Medicare Into Account"
This is a legal term that basically means you can’t treat Medicare-eligible employees differently. You can’t offer them a "special" plan that is secondary to Medicare, and you can't charge them more for coverage just because they’re over 65. If you offer group health insurance for employers, it has to be the same for everyone, regardless of Medicare status.
9. The Small Employer Exception (SEE)
If you have fewer than 20 employees, you can sometimes apply for a formal Small Employer Exception. This allows your group plan to be secondary even if you are part of a larger multi-employer group. However, you have to notify CMS and follow specific steps. You can't just assume you’re exempt because you’re small.
10. Reimbursing Premiums: The HRA Minefield
Want to help your employees pay for their Medicare Part B or Part D premiums? You can do this through a Health Reimbursement Arrangement (HRA) or an Individual Coverage HRA (ICHRA), but it has to be structured perfectly to meet both ACA and MSP rules. If you just hand them a check for their premiums, you might be violating "employer payment plan" rules, which carry a $100-per-day-per-employee penalty under the ACA.
11. Section 111 Reporting (The Silent Killer)
If your plan is primary, you (or your insurer/TPA) must report coverage information for Medicare-eligible individuals to CMS. This is called Section 111 Reporting. Many small business owners have never heard of it, but the government uses this data to make sure they aren't paying claims they shouldn't.
12. Reporting Failures: $1,325 Per Day
The penalties for failing to report Section 111 data are brutal. CMS can impose a daily penalty of $1,325 per affected individual (this fluctuates with inflation) if you don't submit the required information on time. If you have three employees who weren't reported for a month, you're looking at a bill that could bankrupt a small shop.
13. Mistaken Payments and the Treasury
If Medicare pays a claim that your group health plan should have paid (because you were primary and didn't know it), the government will come looking for that money. They call these "conditional payments," and they have the right to recover the full amount from the employer or the insurer, plus interest. They don't take "I didn't know the rules" as an excuse.
14. Employee Penalties: Late Enrollment Hikes
It’s not just the employer who gets hit. If your employees rely on your coverage when they should have signed up for Medicare Part B, they could face a permanent 10% premium increase for every year they delayed enrollment. As their employer, they’re going to look to you for answers when their Medicare bill is higher than expected.
15. Creditable Coverage Notices
Every year before October 15th, you must notify your Medicare-eligible employees whether your prescription drug coverage is "creditable" (meaning it’s at least as good as Medicare Part D). Failing to provide this notice can lead to Part D late enrollment penalties for your employees. Even if you have affordable group health insurance, you still have to send the letter!
Why You Need an Advocate
If your head is spinning, you’re not alone. Between Level funded health insurance, Reference based pricing, and MSP rules, the bureaucracy is designed to be overwhelming. That’s where we come in. At Total Benefit Solutions Inc, we don't just "sell" insurance; we are consultants and advocates who fight for you. We help you navigate these rules so you can focus on growing your business, not auditing your HR files.
Whether you're looking for group health insurance for employers or trying to understand how your Level funded health insurance interacts with Medicare, we have the expertise to keep you compliant and protected. We never accept "no" as an answer when it comes to defending our clients' rights.
Don't wait for a penalty letter to arrive. Contact us today to review your plan and ensure you’re meeting all your Medicare Secondary Payer obligations.
Total Benefit Solutions Inc
(215) 355-2121
www.totalbenefits.net
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