This article aims to provide a comprehensive overview of the complex and changing topic of Medicare Part D creditability determinations and required notifications. The following major topics are covered:
Overview and Immediate Action Plan
Why all the fuss about 2025?
The Medicare Part D out of pocket maximum was reduced from $8,000 in 2024 to $2,000 in 2025. This has a cascading effect on Medicare Part D creditability determinations because, in order to be creditable, a group health plan must offer coverage that is at least as valuable as Medicare Part D . . . which will be a lot more valuable in 2025.
Will Creditability Change for Most Plans in 2025?
Actually, not really. Medicare offers two methods for determining creditability: the “Simplified Method” and the “Actuarial Method.” The good news is that employers may use the Simplified Method through 2025, and the simplified method results in creditable coverage for most comprehensive, fully insured health plans. Therefore, barring any plan change, most plans that were creditable in 2024 will remain creditable in 2025.
Non-Creditable Plans Must Provide Notice to All Employees
Employers must take action and provide notification by October 15th for all plans, particularly for those that are non-creditable. More detail is provided on the required notification process below.
The Recommended Vita Strategy
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Creditable Plans: Formal notification of Part D Creditability is included in the Summary Plan Description that is typically provided to all employees at open enrollment.
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Any Non-Creditable Plans: In addition to Part D Creditability being included in the Summary Plan Description, a separate notice highlighting any non-creditable plans and, specifically, any plans that have been newly determined to be non-creditable should be provided by employers to all employees.
The remainder of the article outlines the details of creditability requirements, notice requirements, and what to expect in future years.
What is Part D Creditability?
Creditable Coverage Determination
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 requires group health plan sponsors that provide prescription drug coverage to provide a notice to Medicare-eligible individuals as to whether the plan’s coverage is “creditable” or “non-creditable.”
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Creditable: Prescription drug coverage is creditable if the actuarial value of the Rx coverage equals or exceeds the actuarial value of standard Medicare Part D coverage.
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Non-creditable: Prescription drug coverage is non-creditable if the actuarial value of the Rx coverage is less than the actuarial value of standard Medicare Part D coverage.
Why Does it Matter?
Knowing whether prescription drug coverage is creditable or non-creditable is important for Medicare-eligible plan participants. The notice of creditability enables employees to make informed decisions about whether to retain their employer-sponsored prescription drug plan or enroll in Medicare Part D coverage during the Part D annual enrollment period. Without the notice, employees would not have the necessary information and may unknowingly become subject to a late enrollment penalty in future years.
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If Creditable: If the employer plan offers creditable coverage, individuals can meet the creditable coverage requirement by enrolling in the employer-sponsored plan. There will be no penalty upon enrolling in Medicare Part D in the future.
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If Non-Creditable: If the employer plan does not offer creditable coverage, individuals would need to find an alternative source of creditable coverage to avoid a future premium penalty. Other coverage may include enrolling in a Medicare Part D plan or electing an alternate employer sponsored plan that offers creditable coverage.
The Penalty
Individuals who do not enroll in Medicare Part D during their initial enrollment period and who subsequently go at least 63 consecutive days without creditable coverage (because they have either no Rx coverage or non-creditable group coverage) will be subject to a premium surcharge if they enroll in a Medicare drug plan later. The premium penalty is equal to 1% of the Medicare base premium for each month of delayed enrollment. Importantly, the monthly penalty is cumulative, so, as an example, if an individual goes 19 months without creditable Part D coverage, the monthly premium would be up to 19% higher than the Medicare Part D base premium. This premium increase is permanent.
Who Makes the Determination?
Employer Notification Requirements
Notice of Creditability Requirements
Notice Requirement: Employers that offer prescription drug coverage to Medicare Part D eligible individuals must issue a Medicare Part D Notice to plan participants. The notice must identify whether the coverage is creditable or non-creditable. The disclosure notice must be provided as follows:
Form of Notice: Many employers elect to include the Medicare Part D Notice for distribution with other open enrollment materials. This method is generally found to be acceptable. However, the notice must be “prominently placed” to ensure receipt by individuals who need the information. In addition, the notice should be included with initial enrollment materials.
Who Must Receive the Notice?
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Technically: The notice must be provided to all Medicare-eligible individuals.
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Practically: The notice should be provided to all employees, retirees, and COBRA participants. Why? While, technically, employers are only required to provide notice to those employees who are Medicare-eligible, practically, employers don’t have any reliable way to know all the individuals in their population who may be Medicare-eligible. Certainly, those who are over age 65 would be included. However, other plan participants (under age 65 employees, dependents, COBRA-qualified beneficiaries, etc.) may also be eligible for Medicare due to disability. As such, the correct course of action is to provide notice to all employees. (Notice to employees is considered notice to the employee’s dependents by extension.)
How is Creditability Determined?
CMS Simplified Determination Criteria
A majority of non-HDHP employer plans today can use the simplified determination of creditability. This method may not be used if an employer plan or union plan is applying for the retiree drug subsidy.
Under the Simplified Determination method, a plan will be deemed creditable if the prescription drug plan design meets all four of the following standards. However, the standards listed under 4(a) and 4(b) may not be used if the employer’s plan has prescription drug benefits that are integrated with other benefits (such as medical or dental benefits) as is the case with HDHP plans. Integrated plans must satisfy the standard in 4(c).
A prescription drug plan is deemed to be creditable if it:
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Provides coverage for brand and generic prescriptions;
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Provides reasonable access to retail providers;
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Is designed to pay, on average, at least 60% of participants’ prescription drug expenses; and
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Satisfies at least one of the following:
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The prescription drug coverage has no annual benefit maximum benefit or a maximum annual benefit payable by the plan of at least $25,000, or
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The prescription drug coverage has an expectation that the amount payable by the plan will be at least $2,000 annually per Medicare-eligible individual.
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For entities that have integrated health coverage, the integrated health plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000, and has no less than a $1,000,000 lifetime combined benefit maximum.
Certain Criteria Moot
It should be noted that these criteria were promulgated in 2009, prior to the passage of the ACA. The following test prongs are moot, but the guidance has not yet been updated:
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Test 4(a) prong that requires a maximum annual benefit for prescription drugs of at least $25,000.
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Test (c) prongs that reference maximum benefits of $25,000 or $1,000,000.
Plan designs with these types of limits are not compliant with ACA requirements, so they typically are not in play today for non-grandfathered plans.
Integrated Plan Definition
For the purpose of the simplified method, an integrated plan is a plan where the prescription drug benefit is combined with other coverage offered by the employer (i.e., medical, dental, vision, etc.), and the plan has all of the following plan provisions:
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a combined plan year deductible for all benefits under the plan,
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a combined annual benefit maximum for all benefits under the plan, and
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a combined lifetime benefit maximum for all benefits under the plan.
In practical terms today, this applies to all HDHP plans. That means that HDHP plans would need to meet steps 1, 2, 3, and 4(c) of the simplified method.
The Issue with HDHP Plans
Qualified HDHP plans will always be integrated plans based on the standard plan structure of combining medical and Rx benefits. As such, HDHP plans would need to satisfy test 4(c) to use the Simplified Determination method; however, test 4(c) limits the plan deductible to $250 per year. Given that HDHP plans have statutory minimum deductibles that are much higher than that, the Simplified Determination method would not be available for HDHPs.
Can the Value of an HRA be included in the Actuarial Valuation?
Yes, the value of an HRA can be included in the creditability determination. This is important for employers who offer a high deductible plan (that might be non-creditable on a stand-alone basis) along with an HRA to lower the effective deductible or cost sharing for employees.
Can the Value of Employer HSA Contributions be included in the Actuarial Valuation?
No, employer HSA contributions cannot be included in the actuarial analysis when determining creditability.
Annual Determination Required
As a reminder, the determination of creditability for a prescription drug plan’s coverage must be performed annually, based on the prescription drug benefits in effect as of the start of the plan year.
Medicare Part D Changes in 2025
The Impact of IRA Changes to Medicare Part D
The Inflation Reduction Act of 2022 (IRA) made important changes to the Medicare Part D program that have the potential to impact creditability of coverage calculations for employers in 2025. Specifically, the out-of-pocket maximum (OOPM) limit was reduced from $8,000 in 2024 to $2,000 in 2025. This reduction in the OOPM increases the actuarial value of the Medicare Part D standard plan, effectively raising the bar for employer sponsored plans. As such, employers can expect an impact on the creditability determinations for group health plans.
Many Employers get a “Free Pass” for 2025
The CMS recently released a notice updating the Medicare Part D creditability guidelines and confirming creditability disclosure requirements for employers. This contained good news for many employers.
Initially the CMS indicated that the Simplified Determination method would no longer be a valid method to determine prescription drug coverage creditability effective in 2025. However, revised instructions permit the continued use of the existing Simplified Determination methodology for the 2025 calendar year. This means that, for plans that are able to use the Simplified Determination method, the increase in Part D actuarial value will not need to be taken into consideration for 2025.
If the Simplified Determination Method is not available, then updated actuarial valuations of plans will need to be made for the 2025 plan year. This actuarial valuation must take into account the newly enhanced Medicare Part D benefits.
Likely No “Free Pass” in 2026 and Beyond
Employers should note that CMS is slated to reevaluate the Simplified Determination method for the 2026 calendar year. It has been hinted that the methodology will establish new criteria for usage. Since the criteria have not been updated since 2003, it is expected that the criteria may be tightened considerably.
The Employee Perspective
Decision Required
Medicare-eligible employees who may be covered under a non-creditable plan will need to make important coverage decisions.
If Coverage is Newly Non-Creditable
While many plans will take advantage of that “free pass” in 2025, some plans will be newly non-creditable in 2025 because of the Medicare Part D changes. With more plans being deemed non-creditable than in prior years, impacted employers will need to spotlight the issue for employees.
Employee Options
Health plan elections are a personal matter. Each employee will need to make a decision from the following general options:
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Maintain coverage under a non-creditable employer-sponsored plan (and face potential penalties when enrolling in Medicare Part D in the future)
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Switch to a creditable employer-sponsored plan (assuming one is offered)
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Waive employer-sponsored coverage and enroll in Medicare (and a Medicare Part D plan)
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Maintain coverage under a non-creditable employer-sponsored plan and supplement coverage with a Medicare Part D plan to avoid a future penalty. Note that this option would disqualify individuals from making HSA contributions (as the Medicare Part D plan would be considered disqualifying coverage). Please note that Medicare requires enrollment in Part A and/or B to enroll in Part D coverage.
What About Medicare-Secondary Payor Issues?
Education Permitted
Employers are permitted to provide information and educational resources to Medicare-eligible employees about their creditable coverage status and plan alternatives.
Incentives Not Permitted
Employers are not permitted to create arrangements that provide an incentive for employees to decline employer-sponsored health plans in favor of Medicare coverage. Employers should be careful to avoid any such incentive arrangements.
Why?
The Medicare Secondary Payor rules expressly prohibit employers from offering any “financial or other incentives” to Medicare-eligible individuals not to enroll (or terminate enrollment) under an employer group health plan that would otherwise be the primary payer. This is because such an election would shift the cost of healthcare to the government (under Medicare) rather than having employers retain the cost of healthcare for working employees who are Medicare-eligible. Avoiding this cost shift (back to the government) is why the Medicare Secondary Payor rules exist.
What if Medicare is Better?
In some cases, Medicare may be a better fit for employees than employer-provided health insurance. In addition, some Medicare-eligible employees may not be aware that they could elect Medicare in lieu of employer-sponsored coverage. This is where education may be helpful for employees. Employees who are aware of their options may voluntarily switch to Medicare due to reasons of lower costs or superior coverage. Such situations can be a win-win, with better health coverage or lower costs for employees and reduced costs for employers. However, education and communication must be provided on an unbiased basis to avoid the appearance of incentivizing employees to opt off.
What’s the Penalty?
The penalty for violating the Medicare Secondary Payor prohibited incentive rules is $5,000 per violation. This would include any time any individual was incentivized to opt off employer-sponsored coverage in favor of Medicare, regardless of whether it is oral or in writing.
Well-Crafted Communication is Important
Well-Crafted Communication
This subject matter is both complex and rife with potential for confusion. Employers will want to carefully craft communications and plan outreach to impacted participants. The communication should provide information for employees to understand the nuances of creditability and the consequences of not maintaining creditable coverage.
Creditability Status Maintained
In the case where health plans maintain creditability in 2025 (either by the Simplified Determination extension or by actuarial analysis), employers must still provide the Medicare Part D Notice of Creditability. However, additional, special communication would not be necessary.
Creditability Status Lost
In the case where a plan moves from creditable to non-creditable status, employers should provide a special communication highlighting any plans that are newly non-creditable. This will enable participants to make informed choices about electing a different (creditable) employer sponsored plan or to enroll in a Medicare Part D plan.
Timing of Special Communication
The timing of employee communication should also be carefully considered. Employers must provide a notice of creditable or non-creditable coverage to Medicare-eligible individuals by October 15 each year (to coincide with the Medicare annual enrollment period). Technically, the regulations reflect that notice requirement pertains to the current plan year (meaning, for example, an October 15, 2024, notice would report creditability information as of January 1, 2024). However, practically, that does not provide useful information for plan participants.
While technically, the regulations reflect notice on a look back basis, we believe this is inconsistent with the law’s intent. Therefore, whenever possible, we recommend that look-forward notifications be provided to employees. This would mean that the Oct 15, 2024, notice would report creditability information for plans as of January 1, 2025. This will provide the information that plan participants would need in order to avoid potential penalties. To the extent renewal decisions and/or actuarial value determinations are not complete by October 15, the notice should be distributed as soon as possible.
Requests for Creditability Notice
If a participant elects to enroll in Part D for 2025, they may be asked (by the Part D insurance company) for a copy of their Creditability Notice. This will be required for the Part D insurer to confirm prior creditable coverage to avoid the premium penalty. Employers should be prepared to provide information on how participants can access or request a copy of creditability notices.
Employer Action Items
Free Pass for 2025 with Simplified Determination
All employers will be required to address plan creditability for 2025 at some level. Plans eligible for the Simplified Determination method are allowed to carry over 2024 creditability determinations and thus will skate by easily.
Without Simplified Determination, Action Required
Plans that are not eligible for the Simplified Determination Method will require more attention for 2025.
Determine Creditability for Plans
Employers will need to confirm creditability for each health plan. This will be provided by the insurance carrier if fully insured or completed via Simplified Determination or Actuarial Analysis if the plan is self-funded.
Action For Plans that Are Creditable
For health plans that have creditable drug coverage or no change to creditability, employers should provide the standard annual Medicare Part D Creditable Coverage Notice to employees as part of their 2025 Open Enrollment communication.
Actions For Plans that are Newly Non-Creditable
For health plans that are newly non-creditable, employers should take the following three steps:
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Provide the standard Medicare Part D Non-Creditable Coverage Notice to employees.
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Provide special communication highlighting non-creditable plans and any loss in creditability status to Medicare-eligible employees covered by impacted plans.
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Strive to communicate to Medicare-eligible employees the consequences of not having creditable coverage and their options for securing creditable coverage (either by selecting a different employer sponsored health plan or by purchasing a stand-alone Medicare Part D plan).
Vita Support
Vita Account Managers will be working with employers and carriers to clarify plan creditability status as soon as it is available. Vita Account Managers will also be guiding employers on creating a communication strategy so that Medicare-eligible employees will be apprised of any changes in creditability and the personal consequences of retaining non-creditable coverage.
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