The Inflation Reduction Act of 2022 (IRA) introduced several changes to Medicare Part D (“Part D”) with the aim of reducing prescription drug costs for Medicare beneficiaries. On April 1, 2024, the Centers for Medicare and Medicaid Services (CMS) published their Final CY 2025 Part D Redesign Program Instructions providing final guidance on the Part D redesign and changes impacting group health plans beginning in 2025.
Part D Requirements and Employer Plans
An individual becomes Medicare eligible (including Part D) when they reach the age of 65 or if they have certain medical conditions. Part D eligible individuals are required to have “creditable coverage,” or coverage that is expected to pay on average at least equal to the standard Medicare prescription drug coverage. Creditable coverage can come from various sources including an employer-sponsored group health plan, a retiree plan, or a traditional Part D plan. If the employer offers creditable coverage, Part D eligible individuals can enroll in their employer’s plan to satisfy the Part D requirements. Otherwise, Part D eligible individuals will need to obtain alternative coverage (e.g., enroll in a Part D plan). Individuals who do not maintain creditable coverage for at least 63 days after their initial enrollment period for Medicare prescription drug coverage may be assessed a late enrollment penalty.
Employers are required to notify Medicare eligible policyholders whether their prescription drug coverage is creditable coverage (a) annually, prior to October 15, (b) prior to the effective date of coverage for Part D eligible employees enrolling in the employer’s group health plan (e.g., new hire onboarding), (c) upon termination of the prescription drug plan, (d) if the creditable coverage status changes, and (e) upon request. The guidance does not specify the timeframe for distributing the notice if the creditable coverage status changes. However, because a change in the creditable status of the plan’s prescription drug coverage may impact plan participants and their decision whether to enroll in a Part D plan, it is recommended that the notice be distributed within 30 days, if not sooner. Medicare eligible policyholders include active employees, spouses, dependents, COBRA qualified beneficiaries, and retirees. Employers will not always know whether an individual is Medicare eligible, so it is recommended that they distribute the notice to all employees.
In addition to distributing the creditable coverage notice, employers are required to report to CMS annually. The disclosure must be filed electronically with CMS (a) within 60 days of the start of the plan year, (b) within 30 days after termination of the prescription drug plan, and (c) within 30 days of any change of the creditable coverage status.
While there are no enforcement penalties if employers fail to comply with the Medicare Part D notice and filing requirements, an employer risks violating ERISA’s fiduciary duties if it misrepresents to participants the plan’s creditable status or fails to make a good faith effort to determine whether coverage is creditable. Failure to comply could also result in employee relations issues.
Changes in 2025
Creditable Coverage Determination Methods
To determine creditable coverage, group health plans have two methods available. The first is an actuarial determination method that uses actual claims experience and demographic data, making it a more expensive, as well as labor intensive option. This option is generally used for plans that receive a Retiree Drug Subsidy (RDS). The second option is the simplified determination method that provides employers (who do not participate in the RDS program) with a more straightforward approach for determining creditable status that does not require complicated actuarial tests. This option is a safe harbor that may be used, but the requirements will vary depending on whether the plan is “integrated,” (i.e., whether the prescription drug plan is integrated with other benefits such as medical, dental, vision) or whether it is offered on a standalone basis.
Initially, CMS proposed eliminating the simplified determination method for 2025 but noted that a change this late in the year could cause substantial disruption for both employers and employees. As such, CMS opted to keep this method as an option for 2025. Further guidance will dictate the availability of the simplified determination method for 2026.
Benefit Changes
Significant changes were made to the Part D plan design for 2025, which includes (among others) a reduction of the maximum out-of-pocket (MOOP) amount to $2,000 (a $6,000 reduction from the $8,000 MOOP amount in 2024). This, along with other benefit improvements, means employers may have a higher threshold for meeting creditable plan status which may come as a surprise to certain employers who are used to their plan status not changing year-over-year. For example, this change will likely preclude high deductible health plans (HDHPs) from qualifying as creditable coverage. As such, employers may need to take some additional action in 2025 to revamp reporting, notice distribution, and/or their communication strategy to ensure Part D eligible employees understand their penalty risk if enrolling in a HDHP (and any other plans with non-creditable coverage) for the 2025 plan year. In doing so, employers should keep in mind the Medicare Secondary Payer (MSP) rules which prohibit employers from suggesting or encouraging employees to drop employer coverage in favor of enrolling in Medicare.
Employer Impact
It is recommended employers consider the following actions for 2025:
- Obtain written confirmation from the carrier or TPA about the creditable or non-creditable coverage status of employer’s plans for the upcoming plan year. For example, the notice due by October 15, 2024, is a way to disclose the creditable status of your plans for the 2025 calendar year to plan participants. If the upcoming calendar year status is not yet known, employers may assume the prior year’s status, but will need to distribute new notices if/when the creditable status of the plan changes.
- Timely distribute the creditable coverage notice prior to October 15 every year and at any other times prescribed by the regulations. Note, while employers must notify employees of their plan’s creditable coverage status, they are not required to offer creditable coverage.
- Consider (while keeping MSP rules in mind) providing additional communications to employees with any non-creditable coverage notices to ensure that Part D eligible employees are aware of the penalty for not enrolling in creditable coverage.
- Complete the online disclosure to CMS within 60 days of the start of the plan year and within 30 days of a creditable status change or termination of the prescription drug plan.
Additional Resources
- Inflation Reduction Act of 2022
- CMS Final CY 2025 Part D Redesign Program Instructions
- Creditable Coverage Simplified Determination
- CMS Overview of Medicare Secondary Payer Rules
Connect with a Sequoia consultant to learn how Sequoia’s compliance services are integrated in our benefits services and tailored solutions. And if you’re already a Sequoia client, stay on top of your employer obligations with your Compliance Checklist that highlights important compliance dates, action items, and resources.
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