As defined-contribution health benefits gain traction, the intersection of ICHRA and Medicare is becoming a critical focus for employers and brokers. From reimbursement rules to Medicare Secondary Payer (MSP) compliance, staying updated on evolving CMS guidance is essential for a sustainable benefits strategy.

Our latest guide breaks down the complexities of integrating these two programs to help you stay compliant and competitive.

Key Insights:

  • Reimbursement: Can ICHRA cover Medicare premiums?
  • Eligibility: Requirements for dual participation.
  • Compliance: Navigating MSP rules and recent regulatory updates.
  • Strategy: Why this pairing is a win for flexible health programs.

This expanded guide is designed to provide a comprehensive, deep-dive exploration of the relationship between Individual Coverage HRAs (ICHRAs) and Medicare.

The Guide for Employers and Brokers on ICHRA and Medicare

As the American workforce ages and healthcare costs continue their upward trajectory, the “one-size-fits-all” traditional group health insurance model is being scrutinized. In its place, the Individual Coverage Health Reimbursement Arrangement (ICHRA) has emerged as a powerhouse for “defined contribution” benefits. One of the most frequent and complex questions surrounding this model is how it interacts with Medicare.

For employers with aging workforces or early retirees, understanding the synergy between ICHRA and Medicare isn’t just a compliance necessity; it’s a strategic advantage.

Understanding the Foundation: What is an ICHRA?

To appreciate the Medicare connection, one must first understand the ICHRA framework. Introduced by federal regulations in 2020, an ICHRA is a health benefit that allows employers to provide a tax-free monthly allowance to employees. Instead of the employer choosing a single group plan for everyone, the employees use their allowance to buy their own individual health insurance on the open market.

The ICHRA model offers three primary pillars of value:

  1. Flexibility: Employees choose the specific plan (and network) that fits their family’s needs.
  2. Cost Control: Employers set a fixed budget (defined contribution), eliminating the volatility of annual group plan renewals.
  3. Portability: If an employee leaves the company, they can take their health plan with them (though the employer’s funding ceases).

For Medicare-eligible employees, this model is particularly attractive because it allows them to integrate their government-sponsored benefits with their employer’s financial support.

Which Medicare Plans Work with ICHRA?

The integration of Medicare into an ICHRA is not automatic; it requires specific types of coverage to satisfy the “Minimum Essential Coverage” (MEC) requirement. To receive tax-free reimbursements, a Medicare-eligible employee must be enrolled in one of the following:

  • Traditional Medicare (Part A and Part B): An employee must have both parts to participate in an ICHRA. Part A covers hospital stays, while Part B covers outpatient services and doctor visits.
  • Medicare Advantage (Part C): These are private plans that combine Parts A and B, and often include prescription drug coverage (Part D).

Why Part B Alone Isn’t Enough

A common misconception is that having Medicare Part B is sufficient for ICHRA participation. Under current IRS and HHS regulations, Medicare Part B on its own does not constitute Minimum Essential Coverage for the purposes of an ICHRA. If an employee only has Part B, the employer cannot legally reimburse their premiums through the ICHRA without risking the plan’s tax-advantaged status.

What Can Be Reimbursed in Medicare?

Once an employee has the proper qualifying Medicare coverage, the ICHRA becomes an incredibly flexible tool for financial support. The employer can structure the plan to reimburse a wide array of Medicare-related expenses, including:

  • Part A Premiums: While most people get Part A for free, those who haven’t worked enough quarters must pay a premium, which is reimbursable.
  • Part B Premiums: The standard monthly premium for medical insurance.
  • Medicare Advantage (Part C) Premiums: The monthly cost for private Advantage plans.
  • Part D Premiums: Prescription drug coverage costs.
  • Medigap (Supplemental) Premiums: These plans help cover the “gaps” in traditional Medicare (deductibles and coinsurance).
  • Qualified Out-of-Pocket Expenses: This includes co-pays, deductibles, and other expenses defined under IRS Publication 502.

The Compliance Landscape: Rules You Cannot Ignore

The intersection of ICHRA and Medicare is governed by a patchwork of IRS, CMS, and Department of Labor rules. Failure to navigate these correctly can lead to significant penalties.

Medicare Secondary Payer (MSP) Rules

The MSP rules are designed to protect the Medicare trust fund by ensuring that employers pay “their fair share” before Medicare steps in. Because an ICHRA is legally considered a “Group Health Plan,” these rules apply.

  • Small Employers (fewer than 20 employees): Generally, Medicare is the primary payer, and ICHRA is secondary.
  • Large Employers (20+ employees): The employer-sponsored plan (the ICHRA) must be the primary payer. As with group health, the employer cannot “nudge” or incentivize an employee to drop their group coverage in favor of Medicare.

Employee Class Rules

The Class Rule is a cornerstone of ICHRA compliance. Employers can offer different reimbursement amounts to different “classes” of employees (e.g., full-time vs. part-time, or by geographic location).

Crucially, “Medicare Eligibility” is not an approved standalone class. You cannot put all Medicare-eligible employees into one class and offer them a different amount than their non-eligible peers in the same category. Doing so violates the “same-term” requirement of ICHRA regulations.

The Prohibition of Incentives

Employers are strictly prohibited from offering financial or other incentives for an employee to waive their group health plan enrollment in favor of Medicare. The ICHRA must be offered as a neutral benefit if an employee chooses to use it for Medicare, that is their prerogative, but the employer cannot mandate or financially “bribe” them to do so.

ICHRA and Medicare Compliance

Section 111 Reporting

Section 111 is a federal mandate from the Centers for Medicare & Medicaid Services (CMS) designed to identify when other health coverages should pay medical expenses before Medicare. While often associated with traditional group plans, these rules also apply to Individual Coverage Health Reimbursement Arrangements (ICHRAs).

  • Section 111 reporting is required for ICHRAs that reimburse qualified medical expenses (under IRS §213(d)) rather than just premiums for Medicare-enrolled employees who are ICHRA participants.
  • Because many ICHRAs are self-administered or managed by platforms that focus solely on enrollment, the technical requirements for Section 111 reporting are frequently overlooked.
  • Reporting is not automatic. The ICHRA administrator, whether that is the employer, a broker, or a third-party platform, must actively:
    • Register with CMS.
    • Identify Medicare-eligible participants.
    • Submit accurate data files on a quarterly basis.

Failure to intentionally assign these tasks often leads to non-compliance, as the requirement depends heavily on how the specific benefit is structured.

Recent Regulatory Shifts: Part D Reporting Simplification

In a major win for administrative simplicity, the Centers for Medicare & Medicaid Services (CMS) issued a final rule in April 2026.

The Change: Starting January 1, 2027, account-based health plans (like ICHRAs and HRAs) are exempt from the “Medicare Part D Creditable Coverage” disclosure requirements.

Previously, employers had to send annual notices to Medicare-eligible participants stating whether their HRAs ‘ prescription coverage was as good as Medicare Part D. CMS realized this was redundant for reimbursement-style plans. While employers must still comply through the 2026 plan year, the future landscape is becoming much more streamlined.

Strategic Transitions: Moving from Group Plans to ICHRA

For employees who have been on a traditional group plan for years, the transition to Medicare can be daunting. Many stay on the group plan and only enroll in Medicare Part A (which is usually free) while delaying Part B to avoid the monthly cost.

When an employer moves to an ICHRA:

  1. The loss of traditional group coverage triggers a Special Enrollment Period (SEP) for Medicare.
  2. This SEP allows employees to sign up for Part B without the late-enrollment penalties they would otherwise face.
  3. Brokers must work closely with these employees to ensure their Medicare Part B or Part C coverage starts the same day the ICHRA begins to avoid a gap in coverage.

Why This Strategy is Gaining Momentum

For Employers, the ICHRA + Medicare strategy offers:

  • Cost Predictability: If a Medicare-eligible employee’s healthcare needs increase, the employer’s cost remains the same as the fixed monthly contribution.
  • Administrative Relief: Moving away from managing a complex group plan reduces the HR burden.
  • Attraction/Retention: It shows aging workers that the company values their tenure and provides a “soft landing” into retirement.

For Employees, the benefits are equally clear:

  • Personalization: They can choose the Medigap or Advantage plan that includes their specific doctors.
  • Tax Efficiency: They receive employer funds tax-free to pay for premiums they would likely be paying anyway.
  • Lower Costs: Often, Medicare + ICHRA reimbursement results in lower out-of-pocket costs for the employee than a high-deductible group plan.

Medicare and The Role of the Broker and Administrator

Navigating these waters is difficult without expert guidance. Brokers play a vital role in:

  • Ensuring the ICHRA contribution meets the “affordability” standards of the Affordable Care Act (ACA) for Applicable Large Employers, called ALEs.
  • Helping employers segment their workforce legally to maximize budget impact.
  • Conducting “Medicare 101” sessions for employees transitioning to the new model.

At Flyte HCM, we specialize in the administration of these complex arrangements. We ensure that substantiation of coverage is handled correctly, reimbursements are processed tax-free, and employers stay on the right side of evolving CMS and IRS guidance.

Final Thoughts

The answer to “Can ICHRA reimburse Medicare premiums?” is a resounding YES, but with caveats. By understanding the enrollment requirements, the MSP rules, and the upcoming regulatory simplifications, employers can build a benefits program that is both modern and sustainable.

Whether you are an employer looking to stabilize your benefits budget or a broker looking to provide cutting-edge advice to your clients, the integration of ICHRA and Medicare is a strategy that deserves a central place in your 2026 planning and beyond

Have questions about how ICHRA and Medicare can work together? We are happy to help. Connect with an ICHRA expert today.