Alerts

Employer health plans have been required to notify their health plan participants whether their health plans offered “creditable coverage” for purposes of Medicare Part D (the prescription drug portion of Medicare) so that any Medicare-eligible person on their plans would know that they could avoid the late enrollment penalty under Medicare Part D (if the coverage is not creditable). The Inflation Reduction Act (the “IRA”) increased the value of Medicare Part D with some changes to the coverage that might have an impact on the creditable coverage analysis for employer plans. 

What is “Creditable Coverage”

• “Creditable prescription drug coverage” means coverage that is expected to pay, on average, at least as much as the standard Medicare Part D prescription drug plan. If you have it, you can postpone (delay) enrolling in Part D without incurring a late enrollment penalty, so long as you don’t have a 63-day (or more) gap without creditable coverage.
• “Standard” Medicare Part D benefit is defined annually by CMS and includes specific deductible, cost-sharing, and maximum out-of-pocket (MOOP) values.

What Changed as of Jan 1, 2025

The Inflation Reduction Act (IRA) brought in several changes to Part D that affect creditable coverage:

1. Out-of-Pocket Threshold / MOOP Cap
   The MOOP for Medicare Part D prescription drug coverage is now $2,000/year starting in 2025. That is significantly lower than in prior years, which increases the actuarial value of the standard Part D benefit.
   
   
2. Elimination of the Coverage Gap / Changes to Discount Programs
   The “coverage gap” (sometimes called the “donut hole”) is restructured. The “Coverage Gap Discount Program” (CGDP) ended in 2024 and has been replaced with a “Manufacturer Discount Program” that increases the mandate for manufacturers to provide discounts to Medicare Part D, which is intended to reduce the costs of prescription drugs. Also, other tweaks were made to what counts toward “True Out-of-Pocket” (TrOOP) costs. These shift the benefit design and valuations that creditable coverage must be measured against. This shift affects how TrOOP is calculated and alters the value of the standard benefit.
   
   
3. Benefit Phases Redefined
   Under the IRA, the standard Part D design now has three phases: deductible, initial coverage, and catastrophic. There are new rules about which costs count toward TrOOP and changes in cost-sharing. All these affect how an employer plan is measured for creditable equivalence. In the catastrophic phase, beneficiaries no longer pay 5% coinsurance; cost-sharing ends entirely once they reach $2k OOP.
   
   
4.  Simplified Determination Method Still Available—for 2025
   CMS has allowed the use of the “simplified determination” method for employer/union group plans that are not participating in the Retiree Drug Subsidy (RDS) program for 2025. This method is a safe harbor to decide whether a plan is creditable without doing a full actuarial equivalence test. Many plans have used this method in the past, and it is still available. CMS confirmed in 2024 guidance that the simplified method is available for 2025 but may change or end in 2026. 
   
   

Impacts: Which Employer Plans Might Lose Creditable Status

Given the changes above, some employer drug plans that were creditable in previous years may no longer be creditable starting in 2025. Strong candidates for this include:

• High Deductible Health Plans (HDHPs) (with or without Health Savings Account). Some of them will have trouble matching the new standard Part D benefit (with lower MOOP, etc.).
• Plans with large cost sharing, limited pharmacy networks, or high deductibles may fail to meet the “actuarial equivalence” test.
• Employers with fully insured plans should receive a determination from the carrier that indicates whether the coverage is or is not creditable. Similarly, employers with self-funded or level-funded plans should obtain that information from their TPAs or PBMs. Some plan sponsors will need new actuarial analyses since the Part D actuarial benchmark value has increased.
  
  

Employer/Plan Sponsor Obligations

Employers are not required to offer plans that provide creditable coverage. Employers who offer plans with prescription drug coverage must do several things to stay in compliance:

1. Determine each plan’s creditable status under 2025’s standard Part D parameters. If a plan changed, the status may have changed. That is because creditability is measured against Part D and its costs, not an arbitrary standard. So, as Part D costs change, the employer plan creditable status will also change relative to Part D (assuming the plan costs are not adjusted in accordance with the Plan D design changes). The status could change even if the employer plan stayed the same since Medicare Part D changed. Employers need to do this per plan / per benefit option.
   
   
2. Provide disclosure notices to Medicare‐eligible individuals in specific circumstances:
   • Annually, before the Medicare Part D open enrollment period (before October 15 each year) for the upcoming plan year.

Note – Many plans include the notice with their open enrollment information, and that is generally permissible. In the event that the October 15 deadline is missed, employers should still send the notices, as there is no penalty for late notice. It will also still give any affected individual time to change their elections during the Medicare open enrollment period.

• When someone becomes eligible for the plan (new hire or becoming Medicare‐eligible) before their coverage becomes effective.
• If the plan's prescription drug benefit ends or changes so that it is no longer creditable (or becomes creditable).
• Upon request by a Medicare-eligible individual.

The notice must clearly say whether the coverage is creditable or not, explain what that means (especially about possible late enrollment penalty), and include required data elements as set by CMS.

1. Notify CMS of whether the prescription drug coverage is creditable or non‐creditable via the CMS Creditable Coverage Disclosure webpage:
   • All plans (whether calendar year or off-calendar year) need to send the October 15 notice since it is tied to Medicare open enrollment. In addition, plans need to file with CMS within 60 days after the plans’s renewal date, i.e., within 60 days after the plan year begins.
   • If coverage changes or creditable status changes: within 30 days of that change.
2. Maintain documentation—actuarial determinations if needed; simplified determination paperwork; copies of notices, etc.
   
   

What’s New Looking Forward to 2026

• CMS issued a memo in mid-2025 revising guidance (“HPMS memo”) for CY 2026 regarding Creditable Coverage Period Determinations and Late Enrollment Penalty (LEP) guidance.
• The “simplified determination method” may undergo more changes for 2026. CMS has not specified when any adjusted guidance will be issued, but we hope it will provide sufficient time to adjust plan designs if desired (remember, there is no obligation to provide creditable coverage, just to notify participants of that status either way.) Since 1/1/26 renewals are around the corner, this is an important note to consider: CMS is evaluating whether to continue it as is or alter it given the Part D benefit redesign.
• The actuarial standard that employer plans must meet is rising, because the standard Part D benefit has become more generous (lower MOOP, no coverage gap, etc.). That means it will become more difficult for many employer plans to qualify as creditable.
  
  

What Beneficiaries/Medicare-Eligible Individuals Should Know

• If you are eligible for Medicare Part D, check whether your employer coverage is declared “creditable.” If it is, you can delay enrolling in Part D without penalty. If not, or if there’s a change, enrolling timely in Part D is important to avoid penalties.
• Keep any notices you receive about creditable coverage—they can be needed to prove that you had continuous creditable coverage if/when enrolling in Part D later.

This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.