Can an Employer Pay for Medicare Premiums? QSEHRA, ICHRA, or Wages

An employer can help pay for an employee’s Medicare premiums, but only through specific arrangements that comply with the Affordable Care Act. The two main compliant options are a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and an Individual Coverage Health Reimbursement Arrangement (ICHRA), both of which allow tax-free reimbursement of Medicare Part B, Part D, and Medigap premiums when set up correctly. A third option, simply raising the employee’s wages, is always legal but costs both sides more in taxes.

Writing a check directly for a worker’s Part B premium, or adding a line-item reimbursement to a paycheck, is not one of the compliant options. That approach can trigger an excise tax of $100 per day per affected employee.

Why Direct Reimbursement Is Off the Table

When an employer reimburses or directly pays an employee’s individual health insurance premiums, including Medicare, the IRS treats the arrangement as an “employer payment plan.” Employer payment plans are group health plans, and they cannot satisfy ACA market reforms because they impose an inherent annual dollar limit and cannot guarantee preventive services without cost-sharing.¹ So the informal check-writing that was common before 2014 is now a noncompliant group health plan, even when the employer’s intent is generous.

The penalty for getting this wrong lives in Internal Revenue Code Section 4980D: $100 per day for each affected individual, running from the day the violation begins until it is corrected.² For a single employee, that is $36,500 a year. For ten employees on the same noncompliant arrangement, exposure reaches $365,000 annually.

A separate rule under the Medicare Secondary Payer statute prohibits employers from offering financial incentives to push Medicare-eligible workers off the group health plan and onto Medicare. That includes cash, prescription-only coverage, or other benefits in exchange for declining group coverage, and it carries a civil penalty of up to $5,000 per violation.³ Helping an employee pay Medicare premiums through a compliant HRA is legal. Pressuring them to drop group coverage in favor of Medicare is not.

Qualified Small Employer HRA

A QSEHRA is available to employers that had fewer than 50 full-time employees in the prior year and do not offer any group health plan.⁴ The employer funds the arrangement, and employees submit receipts for qualified medical expenses, including Medicare Part B, Part D, and Medigap premiums. Reimbursements are tax-free as long as the employee maintains minimum essential coverage.⁵

Annual reimbursements are capped. For 2026, the maximum is $6,450 for self-only coverage and $13,100 for family coverage. An employer can offer less than the cap but cannot exceed it. If an employee doesn’t submit claims, the employer keeps the money, though unused amounts can be rolled to the next year at the employer’s discretion.

One design constraint matters if the plan is aimed at a Medicare-eligible worker: a QSEHRA cannot limit reimbursements to only Medicare or Medigap premiums. Doing so risks violating the “same terms” requirement, because the benefit would not be effectively available to employees who are not on Medicare.⁴

Individual Coverage HRA

An ICHRA works for employers of any size, including those that maintain a traditional group health plan for other employee classes. There is no statutory maximum contribution, so the employer decides how much to reimburse. Eligible expenses include premiums for Medicare Part A, Part B, Part C, Part D, and Medigap.

To receive ICHRA reimbursements, a Medicare-eligible employee must be enrolled in Part A and Part B together, or in Part C (Medicare Advantage). Part B alone does not satisfy the requirement, and the employer must verify enrollment before processing reimbursements.

Employers using an ICHRA can divide workers into distinct classes such as full-time, part-time, salaried, or hourly, and offer different reimbursement amounts to each class. Within any single class, every employee must receive the same offer. When the employer offers a group plan to some classes and an ICHRA to others, minimum class-size rules apply to prevent cherry-picking healthy employees for the group plan.

Taxable Wage Increase

The simplest approach is to raise the employee’s pay by enough to cover their Medicare premiums. Because the extra compensation is not conditioned on buying health coverage, it falls outside the “employer payment plan” definition and outside the HRA rules entirely.

The catch is tax efficiency. Additional wages are subject to federal income tax, state income tax where applicable, and FICA taxes for both the employer and employee. A $200 monthly raise to cover Part B nets the worker considerably less than $200 after withholding, and the employer still owes its matching share of Social Security and Medicare tax.

There is a second catch specific to Medicare. Higher-income beneficiaries pay the Income-Related Monthly Adjustment Amount (IRMAA) on Part B and Part D, based on modified adjusted gross income from two years earlier. For 2026, individuals with income at or below $109,000 (or $218,000 for joint filers) pay the standard $202.90 Part B premium with no surcharge; above that, surcharges start at $81.20 per month and escalate quickly.⁶ A wage bump that pushes the employee across an IRMAA threshold can cost them more in surcharges than they gained in pay. QSEHRA and ICHRA reimbursements are excluded from income and do not affect IRMAA.

Tax Treatment Side by Side

How the employer structures the help determines who pays taxes on what.

QSEHRA or ICHRA reimbursements are tax-free to the employee as long as they maintain qualifying coverage. The employer deducts reimbursements as a business expense. Neither side owes FICA on the amounts.⁵
A taxable wage increase is included in the employee’s gross income and hit with federal and state income taxes plus the employee’s FICA share (6.2% Social Security up to the wage base, 1.45% Medicare, and 0.9% Additional Medicare Tax above $200,000). The employer pays its matching FICA share.

For an employee in the 22% federal bracket, a $2,436 annual raise (roughly twelve months of the $202.90 Part B premium) loses about $530 to federal income tax and another $186 to the employee’s FICA share, before state taxes. A QSEHRA or ICHRA reimbursing the same $2,436 costs the employee nothing in tax. That gap is why the HRA route is the preferred approach when the employer qualifies.

The HSA Trap to Warn Employees About

Employees who have been contributing to a Health Savings Account need to plan around Medicare enrollment before accepting HRA reimbursements. Once you enroll in any part of Medicare, including Part A, your HSA contribution limit drops to zero.⁷ Existing HSA balances can still be spent tax-free on qualified medical expenses, but no new money goes in.

The wrinkle: Medicare Part A can apply retroactively for up to six months. An employee who delays Social Security past 65 and later enrolls may find Part A coverage reaching back into months when they were still contributing to an HSA. Those contributions become excess contributions, subject to a 6% excise tax for each year they remain in the account.⁷ Withdrawing the excess plus earnings before the tax filing deadline fixes it, but the retroactivity often catches people unaware. The safe move is to stop HSA contributions at least six months before the anticipated Medicare Part A effective date.

Administrative Requirements the Employer Should Expect

Setting up an HRA is not just about writing reimbursement checks. Both QSEHRAs and ICHRAs come with notice and reporting obligations.

A QSEHRA requires a written notice to each eligible employee at least 90 days before the start of each plan year, or on the date the employee first becomes eligible if later. Missing that deadline triggers a penalty of $50 per employee, up to $2,500 per year, though it doesn’t disqualify the plan itself.⁴

An ICHRA also requires a written notice at least 90 days before the plan year begins. It must include the maximum dollar amount available, the plan year dates, opt-out procedures, and a reminder that the employee cannot claim premium tax credits for any month they are covered by the ICHRA.⁸

Both HRAs also require the employer to file Form 720 annually to report and pay the Patient-Centered Outcomes Research (PCOR) fee, calculated on the average number of covered lives.⁹ Many employers hire a third-party administrator to handle plan documents, claims, and reporting. Fees typically run $20 to $100 or more per employee per month depending on the provider, so that cost belongs in the overall budget alongside the reimbursements themselves.

Choosing Among the Three Options

The right structure depends on the employer’s size and existing coverage. A small business with fewer than 50 full-time employees and no group health plan fits the QSEHRA model. An employer of any size, or one that wants to keep a group plan for some workers while reimbursing others, fits the ICHRA model. A taxable wage increase is the fallback when neither HRA works for the situation, or when the employer wants the simplicity of payroll rather than a plan document, notice, and Form 720 filing. For a Medicare-eligible worker, the wage-increase route deserves an extra look at whether the raise would push modified adjusted gross income into a higher IRMAA bracket before it is finalized.

1
Internal Revenue Service. IRS Notice 2013-54 – Application of Market Reform Provisions to Employer Healthcare Arrangements
2
Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements
3
eCFR. 42 CFR 411.103 – Prohibition Against Financial and Other Incentives
4
Internal Revenue Service. Qualified Small Employer Health Reimbursement Arrangements Notice 2017-67
5
HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers
6
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
7
Internal Revenue Service. Health Savings Accounts and Other Tax-Favored Health Plans
8
U.S. Department of Labor. Individual Coverage HRA Model Notice
9
Internal Revenue Service. Patient-Centered Outcomes Research Institute Fee