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This month, the Centers for Medicare and Medicaid Services (CMS) announced final instructions for the changes to Medicare Part D prescription drug coverage mandated by the Inflation Reduction Act of 2022 (IRA) which will affect employer-sponsored plans in 2026. The changes are intended to enhance benefits and offer cost savings for enrollees but will also impact the ability of some prescription benefit plans to continue qualifying as creditable coverage.
What significant change did the IRA make to the creditable coverage determination?
The IRA generally increased the benefits and actuarial value of Medicare Part D coverage. As a result, when employer plans are compared actuarially to the Medicare Part D coverage, the employer plan must be designed to pay 72 percent of participants’ prescription drug expenses, compared to 60 percent in the previous standard. Employer prescription drug coverage that previously met creditable coverage standards may no longer do so when compared against the higher benchmark of the improved Medicare Part D.
How can an employer determine if prescription drug coverage is creditable coverage?
Employers will typically rely on their insurance carrier, third-party administrators (TPAS), pharmacy benefit managers (PBMs), and administrative services only (ASO) providers for guidance on whether the actuarial value of a particular benefit option qualifies as creditable or prescription drug coverage for Medicare-eligible employees.
Instead of the annual actuarial valuation, CMS offers a simplified determination of creditable coverage status for plan sponsors if the prescription drug benefit option meets certain design and coverage requirements.
Prescription drug programs participating in the retiree drug subsidy (RDS) program are not eligible for the simplified determination.
The Final Instructions issued April 7, 2025, provide a revised simplified determination method that may be used beginning January 1, 2026. The revised method aligns the requirements more closely to the actuarial value of Medicare Part D as updated by the IRA and eliminates certain outdated requirements (for example, conditions relating to preexisting conditions and annual limits that are no longer permissible after enactment of the Affordable Care Act).
What are the requirements in the final instructions for the revised simplified determination?
Under the revised simplified determination method, a plan will be deemed to provide prescription drug coverage with an actuarial value that equals or exceeds the actuarial value of Part D coverage if it:
- Provides reasonable coverage for brand name and generic prescription drugs and biological products
- Provides reasonable access to retail pharmacies
- Is designed to pay on average at least 72 percent of participants’ prescription drug expenses
The current simplified method only requires coverage of 60 percent of participants’ prescription drug expenses. Employers using the simplified method should compare the requirements under the current and revised simplified determinations to determine if their prescription drug plan will qualify under the new standards. For 2026 only, non-RDS group health plans are permitted to use either the existing simplified determination methodology or the revised simplified determination methodology.
How do these changes to the creditable coverage simplified determination impact employees and covered participants?
Employer plan sponsors are not required to offer prescription drug coverage to their employees. But, if they do, they must provide an annual notification to Medicare Part D-eligible plan participants of their prescription drug plans’ creditable coverage status (typically referred to as the “Notice of Creditable Coverage”). Individuals eligible for Medicare Part D 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. As a result, this Notice of Creditable Coverage serves an important purpose for these individuals to prove they maintained creditable coverage and avoid late enrollment penalties when they ultimately enroll in Part D.
It is not legally required that prescription drug coverage be creditable, but it can cause employees in non- creditable coverage options to have lifetime penalties if they fail to enroll in Medicare in lieu of or in addition to employer-sponsored coverage.
What steps should sponsors of HDHPs take to continue to qualify as creditable coverage?
For employers who sponsor high deductible health plans (HDHPs), satisfying the higher 72 percent threshold under the revised simplified method and increased actuarial value of Medicare Part D may be a concern. The Final Instructions and related guidance suggest that HDHPs should:
- Not apply a deductible to preventive (i.e., maintenance) medications
- Use a reasonable and supportable allocation of the HDHP deductible attributable to prescription drug expenses
- Offer lower cost-sharing than standard Part D coverage once the deductible is met
CMS acknowledges that the higher actuarial value may cause some prescription drug programs to fail to meet the creditable coverage standards and this is one of the stated reasons for allowing employers to use either the current or revised simplified determination standard for 2026 as a way of easing the transition.
Bim Group will work collaboratively with our clients to ensure there is a clear plan and methodology in place for evaluating the Medicare Part D creditable coverage status of the employer’s prescription drug offerings for 2026. We will assist in determining which approach may be most advantageous and ensures timely and accurate disclosures to employees and retirees.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
