By: HUB’s EB Compliance Team

The Inflation Reduction Act made several changes to Medicare Part D beginning in 2025. While the provisions allowing the federal government to negotiate prices for prescription drugs and requiring drug manufacturers being pay rebates to the federal government have gained more attention, changes to Part D out-of-pocket maximums (“OOPM”) and creditable coverage determinations have the greatest potential to impact employer sponsored plans.

The Part D Rules

Under the Part D rules, those who are eligible for Part D need to have creditable coverage. “Creditable coverage” refers to prescription drug coverage that actuarially is equal to or greater than the coverage provided under Part D. Creditable coverage can come from practically any source including an employer sponsored plan, a retiree plan, or a traditional Part D policy. Those who fail to maintain creditable coverage for a period greater than 63 days after their initial enrollment period will face a penalty equal to 1% of the national average premium for each month they delay enrollment. This penalty is added to the Part D premium and generally remains as long as the individual has Medicare prescription drug coverage.

Part D and Employer Plans

Employers are required to provide Part D eligible individuals with a notice indicating which, if any, plan options offer creditable coverage. The purpose of this notice is to enable employees and spouse eligible for the employer sponsored plan to make informed decisions to avoid the late enrollment penalty.

If the employer offers a plan option that provides creditable coverage, Part D eligible individuals can comply with the creditable coverage requirement by enrolling in the plan. If the employer does not offer a plan option that provides creditable coverage, Part D eligible individuals need to look for alternative sources of creditable coverage, which may include enrolling in a Part D plan.

Creditable Coverage Determinations

The Centers for Medicare and Medicaid Services (“CMS”) provided, and has retained for 2025, a simplified method for determining whether coverage is creditable. When a plan’s design is not eligible for the simplified method, an actuarial determination must be made using that year’s applicable parameters, which is a more expensive process. The simplified method contains two potential pathways to creditable coverage: one for integrated plans and one for non-integrated plans.

Integrated means the prescription drug benefits are combined with other benefits under the plan, such as health, dental, or vision and meets certain plan design requirements. Plans that have separate benefit maximums on non-essential health benefits (such as a plan that provides fertility related coverage with a $25,000 lifetime maximum) as well as plans that have separate deductibles (such as a separate prescription drug deductible within the plan deductible) are not considered integrated. Thus, many plans that appear integrated at first glance are not truly integrated. This ultimately benefits the plans as the non-integrated requirements are easier for plans to satisfy. More details on the simplified method are available at this link.

Effect of Changes

Starting In 2025, Part D begins to function more like traditional non-Medicare coverage, with a true OOPM of $2,000. This and other benefit improvements under Part D means that employers who cannot use the simplified method will be held to a heightened threshold for determining creditability. Some employer sponsored plans that are creditable in 2024 under an actuarial determination will likely not be creditable in 2025. Employers who wish to keep creditable coverage in 2025 may need to make certain plan design changes to improve the actuarial value of the plan’s prescription drug benefits.

Individuals who are eligible for Part D may potentially benefit from the OOPM, but this is not universal. The OOPM applies only to the prescription drug benefits under Part D. It does not apply to benefits, including prescription drug benefits, falling under Parts A and/or B of Medicare. In contrast, OOPMs under employer sponsored plans typically apply to the plan as a whole, rather than just a particular piece of the plan. Therefore, the OOPM for Part D may or may not result in lower overall healthcare costs for someone choosing Medicare over their group health plan.

Coordination of Benefits Considerations

Part D-eligible individuals who are eligible for employer sponsored coverage that is not creditable could choose to enroll in both to avoid the late enrollment penalty. However, they should also understand that Medicare coordination of benefits rules may mean they get little to no benefit from the Part D plan if they enroll in both that and the employer plan. These rules determine whether Medicare or the employer plan pays claims primary. For age-based Medicare, employer plans pay primary if the employer has 20 or more employees for each working day in at least 20 weeks during the current or previous calendar year.

If an employer plan does not provide creditable coverage and pays claims as primary, those who enroll in the employer plan and a separate Part D policy will not receive the benefit of the Part D OOPM. In this scenario, such individuals may be better off simply waiving the employer plan and enrolling in Medicare. Employees who are Medicare-eligible but only enroll in their employer’s plan to provide coverage for their spouse or dependents who are not Medicare-eligible may end up paying for both employer-sponsored coverage for their family and Medicare coverage for themselves.

Looking Ahead

While the addition of the $2,000 OOPM under Part D will impact individuals starting in 2025, employers may not be directly impacted by the changes to Part D until 2026. When CMS retained the simplified method for 2025, they indicated they would revaluate the continued use of the current simplified method for 2026, or potentially establish a new simplified method. As 2024 is an election year, the outcome of the various elections may influence what CMS ultimately does with the simplified method.

Employers that cannot use the simplified method, or are concerned about their plans becoming non-creditable based on the changes, should consider how they will communicate these options to employees. They will want to make sure employees are aware of the Part D penalty that could apply for not enrolling in creditable coverage. In doing so, they must take into account Medicare Secondary Payer rules, which generally do not allow employers to provide incentives for employees to drop employer coverage in favor of Medicare.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.