Medicare (US)
The US federal health insurance program primarily serving people aged 65 and older, funded through payroll taxes (FICA) that employers must withhold and match for all employees regardless of age.
- What Is Medicare?
- The Four Parts of Medicare
- Employer Medicare Tax Obligations
- Medicare Coordination with Employer Health Plans
- Medicare Enrollment: What HR Teams Need to Know
- Employer-Sponsored Retiree Health Benefits and Medicare
- Common Medicare Issues HR Teams Encounter
- Medicare Statistics and Key Data [2026]
- Frequently Asked Questions About Medicare
What Is Medicare?
Key Takeaways
- ✓Medicare is the US federal health insurance program covering people aged 65 and older, as well as younger people with certain disabilities or end-stage renal disease.
- ✓67 million Americans are enrolled in Medicare, representing about 20% of the US population (CMS, 2024).
- ✓Employers must withhold and match 1.45% of all employee wages for Medicare tax (FICA), with no wage cap, meaning it applies to every dollar earned.
- ✓Employees earning over $200,000 pay an additional 0.9% Medicare surtax that the employer is not required to match.
- ✓Medicare matters to employers because of payroll tax obligations, coordination with employer health plans for employees 65+, and benefits communication for employees approaching retirement.
Medicare is the federal health insurance program in the United States, established in 1965 as part of President Lyndon B. Johnson's Great Society legislation. It provides health coverage to people aged 65 and older, people under 65 with certain disabilities, and people of any age with end-stage renal disease (permanent kidney failure requiring dialysis or transplant) or amyotrophic lateral sclerosis (ALS). For HR professionals, Medicare intersects with daily operations in three ways. First, every employer must withhold Medicare taxes from employee paychecks and pay the employer match. This applies to all employees from day one, not just those near retirement age. Second, employers with employees aged 65+ must coordinate their group health plan with Medicare, and the rules depend on company size. Third, employees approaching 65 need guidance on Medicare enrollment, which affects their employer health plan decisions. Medicare isn't a single program. It's divided into four parts (A, B, C, and D), each covering different services with different funding mechanisms. Understanding this structure is necessary for HR teams supporting employees through the transition from employer coverage to Medicare.
The Four Parts of Medicare
Medicare is divided into four parts, each covering different services. Understanding what each part does helps HR teams advise employees approaching Medicare eligibility.
Original Medicare vs Medicare Advantage
Original Medicare (Parts A + B) is the traditional government-run program. Beneficiaries can see any doctor who accepts Medicare (about 93% of physicians do). There's no network restriction, but there's also no annual out-of-pocket maximum. Many Original Medicare beneficiaries purchase a Medigap (supplemental insurance) policy to cover gaps like the Part A deductible ($1,676 in 2025) and the 20% coinsurance under Part B. Medicare Advantage (Part C) is offered by private insurance companies approved by Medicare. These plans must cover everything Original Medicare covers and often include additional benefits like dental, vision, hearing, and prescription drugs. They use provider networks (HMO or PPO) and charge copays for services. The tradeoff: narrower provider access in exchange for lower out-of-pocket costs and integrated coverage. About 54% of Medicare beneficiaries now choose Medicare Advantage, up from 24% in 2010 (KFF, 2024).
| Part | What It Covers | Monthly Premium (2025) | Funding Source |
|---|---|---|---|
| Part A (Hospital Insurance) | Inpatient hospital stays, skilled nursing, hospice, some home health | $0 for most (premium-free if 40+ quarters of work history) | Medicare payroll tax (FICA) |
| Part B (Medical Insurance) | Doctor visits, outpatient care, preventive services, durable medical equipment | $185/month (income-adjusted, up to $628/month) | General revenues + beneficiary premiums |
| Part C (Medicare Advantage) | Private plan alternative covering Parts A + B, often includes drug coverage | Varies by plan ($0 to $200+/month on top of Part B premium) | Federal payments to private insurers |
| Part D (Prescription Drugs) | Outpatient prescription medications | $30 to $50/month average (income-adjusted surcharge above $106,000) | General revenues + beneficiary premiums |
Employer Medicare Tax Obligations
Medicare payroll tax is one of the most straightforward but consequential employer tax obligations. Unlike Social Security tax, there's no wage cap.
Standard Medicare tax
Both the employer and the employee pay 1.45% of all wages. There's no income cap (unlike Social Security, which stops at $176,100 in 2025). For an employee earning $200,000: the employee pays $2,900 in Medicare tax, the employer pays $2,900 in Medicare tax, and the total Medicare tax on that employee is $5,800. This applies to every employee regardless of age, immigration status, or whether they'll ever be eligible for Medicare benefits. The employer's 1.45% share is a deductible business expense.
Additional Medicare Tax (0.9% surtax)
Employees earning over $200,000 ($250,000 for married filing jointly) pay an additional 0.9% Medicare tax on wages above that threshold. The employer is responsible for withholding this additional tax once wages exceed $200,000 in a calendar year, regardless of the employee's filing status. The employer does not match this additional 0.9%. This surtax was introduced by the Affordable Care Act in 2013 to fund Medicare expansion. For an employee earning $300,000: they pay 1.45% on all $300,000 ($4,350) plus 0.9% on the $100,000 above $200,000 ($900), totaling $5,250. The employer pays 1.45% on all $300,000 ($4,350) with no surtax.
FICA compliance basics
Medicare tax is reported on IRS Form 941 (Employer's Quarterly Federal Tax Return) alongside Social Security tax and income tax withholding. Deposits must be made on a semi-weekly or monthly schedule depending on the employer's total tax liability. Late deposits trigger penalties of 2% to 15% depending on how late the deposit is. Most modern payroll systems handle Medicare tax calculations automatically, but HR teams should verify that the 0.9% additional tax kicks in correctly when an employee crosses the $200,000 threshold mid-year.
Medicare Coordination with Employer Health Plans
When employees turn 65 while still working, their employer health plan and Medicare must coordinate. Which one pays first depends on the size of the employer.
Employers with 20+ employees
If the employer has 20 or more employees, the employer's group health plan is the primary payer, and Medicare is secondary. This means the employee can (and should) keep their employer coverage, and Medicare fills in gaps. The employer cannot incentivize, encourage, or require employees to drop employer coverage and use Medicare instead. That's a violation of the Medicare Secondary Payer (MSP) rules and can result in significant penalties. The employee can choose to enroll in Medicare Part A (which is free) and defer Part B enrollment without a late enrollment penalty as long as they have creditable employer coverage.
Employers with fewer than 20 employees
If the employer has fewer than 20 employees, Medicare is the primary payer and the employer plan is secondary. In this case, the employee should enroll in both Medicare Parts A and B at age 65. Their employer plan becomes supplemental coverage. Small employers should ensure employees understand this distinction because failing to enroll in Part B when Medicare is primary can leave coverage gaps and result in late enrollment penalties if the employee enrolls later.
The MSP questionnaire
CMS (Centers for Medicare and Medicaid Services) uses the MSP questionnaire to determine primary/secondary payer status. Employers may receive MSP questionnaires from CMS or from their group health insurer asking about employees who are Medicare-eligible. Responding accurately and timely is important. Incorrect MSP information can lead to improper claims payment, conditional payment demands from CMS, and potential litigation.
Medicare Enrollment: What HR Teams Need to Know
HR teams frequently field questions from employees approaching age 65 about when and how to enroll in Medicare. Understanding the enrollment periods prevents costly mistakes.
Initial Enrollment Period (IEP)
The 7-month window surrounding an employee's 65th birthday: 3 months before their birth month, their birth month, and 3 months after. Employees who are still working and covered by an employer plan with 20+ employees can defer Part B enrollment without penalty. Employees at small employers (under 20) should enroll during the IEP to avoid late enrollment penalties.
Special Enrollment Period (SEP)
When an employee loses employer coverage (due to retirement, job change, or coverage termination), they get an 8-month Special Enrollment Period to sign up for Part B without a penalty. The 8 months start from the date the employer coverage ends (not the date of retirement or job change, if different). Missing this window means waiting until the General Enrollment Period (January 1 to March 31) with coverage not starting until July 1, plus a 10% premium penalty for each 12-month period they could have had Part B but didn't.
HR team responsibilities
While HR teams aren't Medicare counselors, they should: proactively communicate with employees approaching 65 about how employer coverage coordinates with Medicare, provide written notice about whether the employer plan is primary or secondary for Medicare-eligible employees, issue a Certificate of Creditable Coverage when an employee leaves the plan (to prevent Part D late enrollment penalties), and direct employees to their local State Health Insurance Assistance Program (SHIP) for free personalized Medicare counseling.
Employer-Sponsored Retiree Health Benefits and Medicare
Some employers offer health benefits to retirees that supplement Medicare. This practice has declined significantly over the past 30 years.
Declining prevalence
In 1988, 66% of large employers offered retiree health benefits. By 2024, that figure dropped to 18% (KFF). The decline reflects rising healthcare costs, FASB accounting rules (FAS 106) that require companies to book retiree health liabilities on their balance sheets, and the availability of Medicare Advantage plans that provide similar coverage without employer cost. Government employers (federal, state, and local) still commonly offer retiree health benefits, and the unfunded liability for these benefits is a major fiscal concern for many state and local governments.
Employer Group Waiver Plans (EGWPs)
Some large employers use EGWPs to provide prescription drug coverage to Medicare-eligible retirees. These are employer-sponsored Medicare Part D plans that receive federal subsidies. EGWPs allow employers to maintain retiree drug coverage at a lower cost than standalone employer-funded plans. They're common among employers with large retiree populations, such as auto manufacturers, utilities, and government entities.
Retiree Health Reimbursement Arrangements (HRAs)
Instead of providing a group retiree health plan, some employers offer an HRA that reimburses retirees for Medicare premiums and out-of-pocket costs. The employer funds the HRA with a set annual amount ($2,000 to $5,000 is common), and retirees use the funds to pay Part B premiums, Medigap premiums, Part D premiums, and medical out-of-pocket expenses. This shifts the plan selection responsibility to the retiree while still providing financial support from the former employer.
Common Medicare Issues HR Teams Encounter
These situations come up regularly and can create confusion for both employees and HR departments.
The employee who turns 65 and wants to drop employer coverage
At large employers (20+), this is usually a mistake. The employer plan is primary and typically provides better coverage than Medicare alone. If the employee drops employer coverage, they lose the employer's premium contribution and rely solely on Medicare, which has no out-of-pocket maximum. Educate employees that they can have both: employer coverage as primary and Medicare Part A (free) as secondary. Dropping employer coverage to use Medicare may also affect spousal coverage if the spouse is under 65.
The employee who retires and misses the enrollment window
This is the most common and most costly mistake. If a retiring employee doesn't enroll in Part B during their 8-month Special Enrollment Period, they face a 10% permanent premium increase for each 12-month period they could have been enrolled but wasn't. They also have a coverage gap until the next General Enrollment Period. HR teams should send written notification about Medicare enrollment timing at least 60 days before retirement and include it in retirement planning materials.
COBRA and Medicare interaction
If an employee is Medicare-eligible and also has COBRA coverage, Medicare is primary and COBRA is secondary. Electing COBRA does not extend the Medicare Part B Special Enrollment Period. The 8-month SEP is based on when the employer coverage ended, not when COBRA ends. Employees who elect COBRA and wait to enroll in Medicare until COBRA expires may miss the SEP window and face late enrollment penalties. This is a frequent source of confusion that HR teams should address proactively.
Medicare Statistics and Key Data [2026]
Essential Medicare data for HR professionals managing payroll, benefits, and retirement transitions.
Frequently Asked Questions
Does my employer have to offer health insurance if I'm Medicare-eligible?
Can I delay Medicare enrollment if I'm still working?
Do I pay Medicare tax even if I'll never use Medicare?
What is IRMAA and how does it affect my employees?
How does Medicare affect HSA contributions?
Written by Adithyan RK