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. The notice allows employees to make informed decisions about whether to enroll in a Part D plan. 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.

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.

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, which includes a reduction of the maximum out-of-pocket amount to $2,000 in 2025 (a $6,000 reduction from 2024). This, along with other benefit improvements, means employers may have a higher threshold for meeting creditable plan status.

For example, this change will likely preclude high deductible health plans (HDHPs) from qualifying as creditable coverage. As such, employers may want to revamp 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 providing incentives to employees who drop employer coverage in favor of Medicare.

Employer Impact

  • Employers may continue to use the simplified determination method for 2025 but should be aware that their options for determining creditable coverage status may change in 2026.
  • With Medicare creditable coverage status notices due to employees by October 15, employers will want to determine if any changes need to be made to maintain creditable coverage in 2025. Note, while employers must notify employees of their plan’s creditable coverage status, they are not required to offer creditable coverage.
  • Employers may want to 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.

Additional Resources

The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog. © 2024 Sequoia Consulting Group. All Rights Reserved.

Tina Barile — Tina is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Tina enjoys being with family, cooking, reading, and playing sports.