How Medicare Works with ICHRA: A Guide for North Carolina Employers (2025-2026)

If your workforce includes employees who are 65 or older, you may be wondering how an Individual Coverage Health Reimbursement Arrangement (ICHRA) works alongside Medicare. The good news: ICHRA and Medicare work together seamlessly, offering significant advantages for both employers and employees.

This guide explains how Medicare-eligible employees can participate in your ICHRA, what expenses qualify for reimbursement, and why this combination often makes more financial sense than traditional group coverage.

What Is ICHRA?

An ICHRA is an employer-funded benefit that reimburses employees tax-free for individual health insurance premiums and qualified medical expenses. Rather than offering a one-size-fits-all group plan, employers set a monthly allowance, and employees choose the coverage that best fits their needs.

For employees under 65, this typically means purchasing an individual health plan through the ACA Marketplace or directly from an insurer like Blue Cross Blue Shield of North Carolina. For Medicare-eligible employees, the ICHRA allowance helps offset their Medicare-related costs instead.

How ICHRA Works for Medicare Enrollees

When an employee is eligible for Medicare—generally at age 65 or due to certain disabilities—they can use their ICHRA funds to reimburse specific Medicare premiums.

What ICHRA Can Reimburse

• Medicare Part B Premiums: The standard monthly premium for outpatient care, doctor visits, and preventive services. In 2025, the standard Part B premium is $185/month. In 2026, it increases to $202.90/month. Higher earners pay more due to Income-Related Monthly Adjustment Amounts (IRMAA).

• Medicare Part D Premiums: Prescription drug plan premiums vary by plan. The average standalone Part D premium is projected at $34.50/month in 2026 (down from $38.31 in 2025), though actual premiums range from $0 to over $100/month depending on coverage level.

• Medicare Supplement (Medigap) Premiums: Plans A through N that help cover cost-sharing like deductibles, copays, and coinsurance under Original Medicare.

• Medicare Advantage Premiums: If the employee chooses a Medicare Advantage (Part C) plan instead of Original Medicare plus a Supplement, those premiums also qualify. The average Medicare Advantage premium is projected to decrease to $11.50/month in 2026 (for plans with prescription drug coverage).

What ICHRA Cannot Reimburse for Medicare Enrollees?

Unlike ACA plan enrollees with ICHRA, Medicare participants cannot use ICHRA funds for out-of-pocket medical expenses such as deductibles, copays, or coinsurance. The reimbursement is limited to premium expenses only.

Additionally, Part A premiums are generally not reimbursable—but approximately 99% of Medicare beneficiaries qualify for premium-free Part A based on their work history (40 quarters of Medicare-covered employment), so this rarely matters.

Key Differences: ICHRA for ACA vs. Medicare Enrollees

Why Employers Use Flat Contributions for Medicare

Unlike ACA plans, where premiums vary dramatically by age, location, and plan selection, Medicare costs are relatively predictable. Part B premiums are set nationally (with IRMAA adjustments for higher earners), and Supplement/Advantage premiums are consistent within a geographic area.

For this reason, most employers set a flat monthly ICHRA allowance for Medicare-eligible employees rather than a percentage of the premium. A common approach is $350-$450/month, which typically covers:

• Part B premium (~$203/month in 2026)

• Part D premium (~$35-50/month for typical coverage)

• A portion of a Medicare Supplement (Medigap) plan

Employees can use the allowance to fully cover their Part B and Part D premiums, with any remainder applied toward their Supplement premium. If their total premiums exceed the ICHRA allowance, they pay the difference out of pocket.

2025-2026 Medicare Premium Costs at a Glance

Note: Part B premiums may be higher for individuals with modified adjusted gross income above $109,000 (individual) or $218,000 (joint filers) due to IRMAA. In 2026, IRMAA surcharges for Part B range from $81.20 to $487.00 per month, in addition to the standard premium. Approximately 8% of Medicare beneficiaries pay these higher, income-adjusted premiums.

The Reimbursement Process

For Medicare enrollees, the ICHRA reimbursement process is straightforward:

1. Employee Enrolls in Medicare: The employee signs up for Medicare Parts A, B, and D, and optionally selects a Medicare Supplement or Medicare Advantage plan.

2. Proof of Coverage: The employee provides documentation showing they are enrolled in Medicare—typically their Medicare card and premium statements.

3. Submit Premium Expenses: Each month (or on a schedule set by the administrator), the employee submits proof of premium payments—Social Security statements showing Part B deductions, or invoices from their Part D or Supplement carrier.

4. Tax-Free Reimbursement: The ICHRA administrator reviews and reimburses the employee up to their monthly allowance. These reimbursements are tax-free to the employee.

5. Unused Funds: Depending on the plan design, unused allowance may roll over monthly or expire—the employer determines this during plan setup.

Tax Advantages of Medicare + ICHRA

The combination of Medicare and ICHRA delivers significant tax benefits for both employers and employees:

For Employers:

• FICA Savings: ICHRA contributions are not subject to payroll taxes (7.65%), unlike equivalent wage increases.

• Tax Deductibility: ICHRA contributions are fully deductible as a business expense.

For Employees:

• Tax-Free Reimbursements: Unlike paying premiums with after-tax dollars, ICHRA reimbursements are free of federal income tax, state income tax, and FICA.

• Effective Value Multiplier: At a combined marginal tax rate of around 35% (federal + state + FICA), a $400/month ICHRA allowance has a practical value of approximately $615/month in pre-tax wages.

Sample ICHRA Contribution for Medicare Employees

Here's an example of how a $400/month ICHRA allowance might be used by a Medicare-eligible employee in 2026:

In this example, the ICHRA fully covers the employee's Medicare premiums with a small amount remaining. Medigap premiums vary significantly by plan type, carrier, age, and location, so actual costs will differ.

Is ICHRA Right for Your Workforce?

If your company has employees approaching or past age 65, ICHRA offers a flexible, tax-advantaged way to provide health benefits without the complexity of coordinating group coverage with Medicare.

Key benefits include:

• Predictable Costs: Set a fixed monthly allowance and avoid the uncertainty of group plan renewals.

• Employee Choice: Medicare-eligible employees can select the Supplement or Advantage plan that best fits their healthcare needs and budget.

• Mixed Workforce Support: ICHRA easily accommodates both ACA-enrolled and Medicare-enrolled employees under a single benefit structure.

• Tax Efficiency: Both employer and employee realize meaningful tax savings compared to other compensation approaches.

• No Participation Requirements: Unlike group plans that require minimum enrollment percentages, ICHRA has no participation thresholds.

Get a Personalized ICHRA Analysis

Every workforce is different. At Health Plans of NC, we help employers across North Carolina design ICHRA programs that work for employees at every age—whether they're on ACA plans, approaching Medicare eligibility, or already enrolled.