Medicare Part D Changes May Impact Creditable Coverage Status of Employer Plans

The Inflation Reduction Act of 2022 (IRA) includes several cost-reduction provisions affecting Medicare Part D plans, which may impact the creditable coverage status of employer-sponsored prescription drug coverage beginning in 2025.

Employers that provide prescription drug coverage to individuals who are eligible for Medicare Part D must inform these individuals and the Centers for Medicare and Medicaid Services (CMS) whether their prescription drug coverage is creditable, meaning that the employer’s prescription drug coverage is at least as good as Medicare Part D coverage.  Previously, CMS stated in its Draft Part D Redesign Program Instructions that one of the methods for determining whether coverage is creditable (the “simplified determination” method) would no longer be valid as of calendar year 2025, given the significant changes made to Medicare Part D by the IRA.

 However, according to the Final Part D Redesign Program Instructions, CMS will continue to permit the use of the simplified determination methodology, without modification, for calendar year 2025 for group health plan sponsors who are not applying for the retiree drug subsidy. In future guidance, CMS will reevaluate the continued use of the existing simplified determination methodology or establish a revised one for calendar year 2026

Creditable Coverage

• Employers with prescription drug coverage must determine whether their coverage is creditable.
• Medicare Part D requires employers to disclose to CMS and to Medicare Part D-eligible individuals whether their prescription drug coverage is creditable. 
• These disclosures must be provided on an annual basis and at certain other designated times.

Determination Methods

• Ask the health insurance carrier (for insured coverage).
• Simplified determination (for certain plan designs). CMS will reevaluate the continued use of this method or establish a revised one for calendar year 2026.
• Actuarial determination (for all other plans).

Creditable Coverage Determination

A group health plan’s prescription drug coverage is considered creditable if its actuarial value equals or exceeds the actuarial value of standard Medicare Part D prescription drug coverage, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS guidelines. In general, this actuarial determination measures whether the expected amount of paid claims under the group health plan’s prescription drug coverage is at least as much as the expected amount of paid claims under the Medicare Part D prescription drug benefit. For plans that have multiple benefit options (for example, PPOs, HDHPs and HMOs), the creditable coverage test must be applied separately for each benefit option.

Under existing CMS guidance, there are a few different ways for an employer to determine whether its prescription drug coverage is creditable:

• As a first step, employers with insured prescription drug plans should ask their carriers whether they have determined whether the plan’s coverage is creditable.
• For self-insured plans, or where the carrier for an insured plan has not made a determination about whether the plan is creditable, employers may use a simplified determination—as long as the coverage meets certain design requirements. If it doesn’t, the employer must use an actuarial determination method.

CMS will continue to permit the use of the simplified determination methodology, without modification, for calendar year 2025 for group health plan sponsors who are not applying for the retiree drug subsidy. In future guidance, CMS will reevaluate the continued use of the existing simplified determination methodology or establish a revised one for calendar year 2026.

More information and resources on the IRA’s changes to Medicare Part D are available on CMS’ Part D Improvements webpage.

Disclosure to Individuals

Plan sponsors must provide creditable coverage disclosure notices to individuals each year before Oct. 15—the start date of the annual enrollment period for Medicare Part D. The disclosure notice alerts individuals as to whether their plan’s prescription drug coverage is creditable. Model notices are available for employers to use.

Disclosure to CMS

The disclosure to CMS is due within 60 days after the start of each plan year. For calendar year plans, this deadline is March 1 of each year (Feb. 29 for leap years). Plan sponsors are required to use CMS’ online disclosure form.

Enforcement

There is no penalty or fee for the employer for offering prescription drug coverage that is non-creditable. Non-creditable prescription drug coverage can still be a valuable benefit for employees. However, individuals need to know whether their prescription drug coverage is creditable or non-creditable. If the coverage is non-creditable and Medicare-eligible individuals fail to enroll in Part D during their initial enrollment period, they can be subject to a higher Part D premium if they enroll in Part D at a later date.

There are also no specific penalties for employers that fail to comply with the Medicare Part D disclosure requirements, except for employers that are claiming the Retiree Drug Subsidy. However, by not providing creditable coverage disclosure notices, employers may trigger adverse employee relations issues. In addition, noncompliant employers may indirectly face consequences under other federal laws (such as the Employee Retirement Income Security Act’s fiduciary duty provisions).

Action Items

• Employers should confirm whether their health plans’ prescription drug coverage for 2025 is creditable or non-creditable as soon as possible to prepare to send the appropriate Medicare Part D disclosure notices.
• Employers should monitor for future CMS guidance on use of the simplified determination method for calendar year 2026.

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