Question: What are the changes to Medicare Part D imposed by the Inflation Reduction Act that employers should consider with respect to the Notice of Creditable Coverage? 

Short Answer: The IRA has made it more likely that plans (particularly HDHPs) will not be creditable coverage in 2025 and future years.  Where a plan option loses its creditable status, employees will need to weigh their options and consider whether enrollment in Part D is appropriate.  For those not already enrolled in Medicare Part A, it will take weeks to get access to the Medicare card and ID number needed to enroll in Part D, which could jeopardize their ability to enroll during the Part D open enrollment period. 

Medicare Part D Notice of Creditable Coverage: Overview 

With the October 15 start of the Medicare Part D annual open enrollment period looming comes the reminder of the Part D Notice of Creditable Coverage and/or Non-Creditable Coverage (the “Notice”) requirement to inform employees whether their employer-sponsored group health plan’s prescription drug coverage is at least as rich as a Medicare Part D plan.  While the Notice is technically not due to employees until prior to the October 15 Part D open enrollment period start date, employers should make a good faith effort this year to provide the Notice as early as possible in advance of that date in light of multiple impending changes.   

Inflation Reduction Act Changes to Medicare Part D 

The Inflation Reduction Act (“IRA”) makes several modifications to Medicare Part D.  Most relevant to creditable status determinations, the Part D annual out-of-pocket costs will be capped at $2,000 for people with Medicare Part D starting in 2025.  In 2024, the out-of-pocket limit is significantly higher at $8,000 (although limited to $3,300-$3,800 for most).  2025 also brings an end to the Part D coverage gap, more often referred to as the “donut hole,” that applies between the deductible/initial coverage phase and the $8,000 catastrophic limit.  

Employer-sponsored group health plan coverage is creditable for purposes of the Notice if it covers the cost of prescription drugs at an actuarial value that equals or exceeds the actuarial value of Part D coverage.  In other words, the actuarial value of the employer’s prescription drug coverage must be at least as rich as the actuarial value of Part D.    

These 2025 IRA changes to cap enrollee costs at $2,000 (indexed after 2025) and eliminate the donut hole significantly boosts the actuarial value of Part D.  Accordingly, the actuarial value threshold for employer plans to be at least as rich as Part D will increase in 2025, thereby putting the creditable status of many employer plans in jeopardy going forward.  

Determining Part D Creditable Status of Employer’s Health Plan 

There are currently two permitted approaches to determine a group health plan’s creditable status: 

1. Simplified Determination; or  

2. Actuarial Equivalence Determination 

Simplified Determination: May Not Be Available After 2025 

Though the simplified determination is not as “simple” as the title might suggest, it at least avoids the need to work with an actuary.  Initial draft CMS guidance stated the simplified determination would no longer be available starting in 2025 because the IRA changes provide that “it will no longer be a valid methodology to determine whether an entity’s prescription drug coverage is creditable or not.”    

Fortunately CMS backtracked on this approach in the final guidance after receiving a wave of upset commenters at the approach, and perhaps also in part because they “received no comments supporting the elimination of the simplified methodology.”  Commenters appropriately “opined that, without a simplified methodology…plans would be required to make an annual actuarial determination…which would represent a substantial new burden on these plan sponsors.”  

Nonetheless, CMS has not pledged to maintain the simplified determination beyond 2025.  The final guidance states that CMS will “permit use of the existing creditable coverage simplified determination methodology for CY 2025 and will re-evaluate the continued use of the existing or a revised simplified determination methodology for CY 2026 in future guidance.”  

Under the simplified determination as it currently stands at least through 2025, different tests apply depending on the plan’s structure and deductible. In most situations, employer’s prescription drug coverage is considered “integrated” for purposes of the simplified determination because it is combined with medical coverage.    

These typical employer plans that are integrated but have a deductible in excess of $250 must meet the following requirements to be considered creditable under the simplified determination: 

1. Provides coverage for brand and generic prescriptions; 

2. Provides reasonable access to retail providers; 

3. The plan is designed to pay on average at least 60% of participants’ prescription drug expenses; and 

4. 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 the prescription drug coverage has an actuarial expectation that the amount payable by the plan will be at least $2,000 annually per Medicare eligible individual. 

In most situations, the only aspect of this criteria in question is whether the plan is designed to pay on average at least 60% of participants’ prescription drug expenses.  Employers often are aware of that the plan’s overall actuarial value for purposes of determining is at least 60% for purposes of meeting the ACA minimum value standard (i.e., at least as rich as Bronze-level plan on the Exchange), which is also specified in the plan’s SBC.  It is often not as clear whether the prescription drug component by itself meets that 60% standard.  

• Bottom Line: In many cases, the plan’s insurance carrier or third-party administrator will perform the creditable status determination and notify the employer of that determination.  However, such access and expectations can vary regionally, and may be in jeopardy more broadly if the simplified determination is no longer available or more burdensome in 2026 and beyond. 

Actuarial Equivalence Determination 

This approach requires the assistance of an actuary to perform an analysis as to whether the cost of prescription drugs under the employer’s plan is at an actuarial value that equals or exceeds the actuarial value of Part D coverage.  Again, employers often have the ability to rely on a determination performed by their insurance carrier or TPA that avoids the need to directly engage with an actuary.  However, that access may be in jeopardy going forward, particularly as creditable status becomes more difficult to achieve and determine.  

CMS Commentary on HDHP Creditable Coverage Status The most common type of employer-sponsored coverage to face challenges meeting the Part D creditable standard are high deductible health plan (HDHP) options designed to be HSA-compatible.  Such coverage must impose a minimum deductible to qualify for HDHP status, which is $1,650 for individual coverage and $3,300 for family coverage in 2025.  

In the 2025 Part D Redesign Program Instructions addressing the changes made by the IRA, CMS responded as follows to a concerned commenter that Part D eligible individuals may have reduced access to creditable HDHP coverage:  

“We agree that it may be more difficult for high deductible health plans to qualify as creditable coverage. Sponsors of group health plans can address this by offering plan choices that do meet creditable coverage requirements…Part D eligible individuals that choose not to enroll in Part D or a plan that provides creditable coverage may face a Part D late enrollment penalty (Part D LEP) later if they do enroll in Part D.”  

Accordingly, HDHP plan options will be less likely to meet the creditable coverage standard in 2025 and beyond under the higher bar set by the IRA.  

• Bottom Line: Employers sponsoring creditable HDHP plan options in 2024 should not assume the plan option will remain creditable in 2025.  Employers should be working with their vendors to ascertain the creditable status of their plans—and particularly their HDHP plan options—early this year to be aware of any potential changes heading into 2025. 

What Happens if Coverage Becomes Non-Creditable in 2025? 

More employees this year are likely to be faced with non-creditable plan options at open enrollment for 2025.  How best to proceed will largely depend on whether the employer offers a creditable plan option alternative.  

Employer Offers Other Creditable Coverage Option(s) 

Most employers offer multiple medical plan options, and in most cases there will be at least one non-HDHP plan option that is likely to retain its creditable status in 2025.  For example, the HDHP may lose creditable status while another PPO or HMO option remains creditable.  Where employers maintain at least one creditable plan option, Part D-eligible individuals (generally those at least age 65+) will likely want to enroll in the creditable plan option to avoid the need to enroll in Part D.  

Employer Does Not Offer Other Creditable Coverage Option(s) 

Where the employer no longer sponsors any creditable coverage option, and the employee does not have access to a creditable plan option through a spouse or domestic partner, employees will need to act quickly to enroll in Part D to avoid a potential creditable coverage gap.  Employees will have access to the Medicare Part D open enrollment period from October 15 – December 7 to receive Part D coverage as of January.    

However, individuals who are not currently enrolled in Medicare will face a significant barrier: They must enroll in Part A and have a corresponding Medicare identification number to get access to Part D.  This process will take time—typically multiple weeks—because of the need to first receive a Medicare card in the mail.  By the time they receive the card with their Medicare number, the Part D open enrollment period may be closing or over depending on when they started the process.  

In these situations, the employee will still have a two-month special enrollment period to enroll in Medicare Part D based on the plan’s loss of creditable status.  That special enrollment period will be January-February for a calendar plan year.  However, the Part D enrollment will be effective the following month, creating a short creditable coverage gap.  Although the gap would be within 63 continuous days to avoid the Part D late enrollment penalty, any period without creditable coverage may cause employee concern.  

• Best Practice: Employers should make good faith efforts to determine the plan’s creditable status and provide the Notice as soon as possible in 2024.  Waiting until a point near the October 15 start of the Part D open enrollment period may create anxiety for employees anticipating a potential loss of creditable status.  It will also cause hardships for those who no longer have access to creditable coverage in navigating the Medicare enrollment system within a compressed timeframe to avoid a potential creditable coverage gap. 

To add insult to injury, in many cases employees making the move to Part D will be coming from a HDHP plan option that lost creditable status.  Enrollment in Part A, as required to enroll in Part D, will be retroactive up to six months.  That will have the unfortunate consequence of causing the employee to lose HSA eligibility for the six-month retroactive period when the employee was enrolled in the HDHP.  This may create the need for employees to work directly with the HSA custodian to process a corrective distribution.  

For more details: 

• How Medicare Affects HSA Eligibility 

• Newfront Go All the Way with HSA Guide 

Who Must Receive the Notice of Creditable/Non-Creditable Coverage? 

Technically, employers must provide the Notice only to “Part D eligible individuals” who are enrolled or seeking to enroll in the employer’s prescription drug coverage.  This includes all individuals enrolled in Medicare Part A or Part B who live in the service area of a Part D plan.  

As a practical matter, employers will not know which employees, spouses, or dependents are enrolled in Part A or Part B, and they will not know which individuals are seeking to enroll in the employer’s plan.  Therefore, employers generally provide the Notice to all employees.  

• Best Practice: Provide the Notice to all employees. It’s not realistic to attempt to target the Notice to only Part D eligible individuals. 

Where Are the Model Notices? CMS posts model versions of the Notice of Creditable Coverage and the Notice of Non-Creditable Coverage in English and Spanish.    

• Note: CMS has not updated the model Notice since 2011.  It is not clear whether they will do so to address changes imposed by the IRA. 

How To Provide the Notice Employers can provide the Notice by three different methods: 

1. Paper delivery by first-class mail; 

2. Paper delivery by hand; or 

3. Electronic delivery where permitted. 

CMS states that electronic delivery is permitted to “plan participants who have the ability to access electronic documents at their regular place of work if they have access to the plan sponsor’s electronic information system on a daily basis as part of their work duties.”  This electronic delivery standard generally follows the ERISA electronic disclosure safe harbor.  

Combining With Other Materials 

Employers may choose to provide the Notice in connection with multiple other annual notices (e.g., CHIP, WHCRA) or other similar materials as a single distribution.    

• For more details: The Required Annual Notices to Employees 

CMS guidance provides that employers may include the Notice with other materials as long as the Notice disclosure is “prominent and conspicuous.”  If the Notice is not on the first page of any such materials, the first page should include a separate box that is bolded or offset on the first page and prominently references the Notice in at least 14-point font.    

CMS provides the following model first-page box language:  

If you (and/or your dependents) have Medicare or will become eligible for Medicare in the next 12 months, a Federal law gives you more choices about your prescription drug coverage.  Please see page xx for more details.  

Why the Notice Matters: The Late Enrollment Penalty 

One unusual aspect of the Notice requirements is that there are no specific penalties for an employer’s failure to provide it.  However, Part D eligible individuals who fail to maintain creditable coverage for a period of 63 continuous days or more will face a late enrollment penalty when they eventually enroll in Part D.  The Part D premium may go up by at least 1% of the Medicare base beneficiary premium for every month a Part D eligible individual is without creditable coverage (e.g., permanent 19% Part D premium increase for 19-month gap in creditable coverage).  

In a situation where an employee was not adequately informed that his or her prescription drug coverage was not creditable, the employee may apply to CMS to have the coverage treated as creditable for purposes of avoiding the late penalty.  

• Bottom Line: Employees enrolled in creditable coverage need the Notice to confirm creditable status and document they maintained creditable coverage when later enrolling in Part D.  Employees enrolled in non-creditable coverage need the Notice to be informed of the late enrollment penalty if they do not choose to a) to enroll in a different employer-sponsored plan option that is creditable, or b) enroll in Part D during the Medicare open enrollment period. 

One Other Part D Disclosure Requirement 

Keep in mind that there is also a separate requirement for the employer to disclose online to CMS within 60 days of the beginning of their plan year whether their plan provides creditable coverage.  For employers with a calendar plan year, the 2025 filing deadline is March 2.  For more details: 

• Disclosure to CMS Form 

• Creditable Coverage Disclosure to CMS Guidance 

• Creditable Coverage Disclosure to CMS Instructions & Screen Shots 

Where Can I Find More Employer-Related Medicare Information? The following materials provide additional Medicare information for employers: 

• Newfront Medicare for Employers Guide

• The Medicare Form CMS-L564 for Employers 

• How COBRA and Medicare Interact for Retirees 

• The Medicare Enrollment COBRA Extension 

• How Medicare Affects HSA Eligibility 

• Early Termination of COBRA Upon Enrollment in Medicare 

• Medicare Secondary Payer Size Thresholds 

• Medicare Considerations for Retiring Employees 

• Medicare Secondary Payer Prohibition of Employer Opt-Out Incentives 

Summary 

The changes to Medicare Part D in 2025 caused by the IRA will generally be celebrated by most Part D eligible individuals as significantly improving the benefit through changes such as the reduced out-of-pocket maximum and the elimination of the donut hole.   However, they will also create some transitional concerns for those with employer-sponsored coverage, particularly with respect to the potential for plans to lose creditable status because of the increased threshold for creditable status going forward.    

Employers can best assist employees with these well-founded concerns by working with their insurance carrier, TPA, or other vendor early to determine the plan’s creditable status for 2025 and provide the Notice informing employees of the plan’s creditable status as far in advance as possible of the October 15 Medicare Part D open enrollment period.    

Part D eligible employees enrolled in a plan option that is losing creditable status in 2025 will want to utilize the employer’s open enrollment period to choose in a different plan option that will retain creditable status.  Where no such creditable option is available, the employee will need to act quickly to access Part D coverage by January and thereby avoid a creditable coverage gap.  This will require enrollment in Part A and receipt of a Medicare card and ID number, which is a process that can take multiple weeks to complete.  The earlier employees receive the Notice, the more likely they will be able to timely navigate the employer and/or Part D open enrollment process to have creditable coverage in place by January.  

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law). 

For more details on these issues, register for our July 18 Newfront Office Hours Webinar: Medicare for Employers.