One of the annual reporting obligations for both fully insured and self-funded health plans is the Centers for Medicare & Medicaid Services (CMS) Medicare Part D Creditable Coverage notice. The reporting requirement for plan sponsors has two components: the first is to electronically submit plan information directly on the CMS website; the second is to provide an annual participant notice. This blog addresses the participant notice.
What is Creditable Coverage?
The Department of Health and Human Services (HHS) explains Medicare eligibility as, “Generally, Medicare is for people 65 or older. You may be able to get Medicare earlier if you have a disability, End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant), or ALS (also called Lou Gehrig’s disease).” In addition to Medicare coverage, Medicare beneficiaries enroll in a stand-alone prescription drug plan under Medicare Part D.
Creditable coverage is the term that relates to the prescription drug portion of a group health plan. To be creditable, a group health plan’s prescription drug plan is expected to pay as much or more for prescription drugs than the Medicare Part D plan would pay; if the plan does not pay as much as a Medicare Part D plan, the coverage is considered non-creditable.
If someone chooses not to enroll in Medicare/Medicare Part D when first eligible, it tends to be because they are already covered by an employer or union health plan, which could be considered prior creditable coverage. However, if they enroll without having prior creditable coverage and they do not sign up for Part D coverage at this first opportunity, they may have to pay a higher premium when they eventually enroll.
Participant Creditable Coverage Notice
The creditable coverage notice is sent to plan participants annually before October 15. Participants include both active employees and retirees covered by a retiree plan. Employers often choose to include the notice with new hire benefit forms and then yearly with open enrollment materials. Consultants recommend plans distribute notices to all participants and dependents and not just those over 65 because most employers don’t know who is Medicare eligible.
As mentioned earlier, part one of the reporting requirement for CMS creditable coverage is for plans to report their data on the CMS website, which includes the date the plan sponsor distributed the participant notice.
Creditable Coverage Determination
Creditable Coverage Disclosure to CMS Guidance says this about the determination:
“Drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of standard Medicare prescription drug coverage, as demonstrated through the use of generally accepted actuarial principles and in accordance with CMS actuarial guidelines. In general, this actuarial determination measures whether the expected amount of paid claims under the entity’s prescription drug coverage is at least as much as the expected amount of paid claims under the standard Medicare prescription drug benefit.”
The actuarial value of a prescription drug plan will vary by health plan and can change from year to year. Determining plan creditability is an annual process for employers, with some using either an actuarial process or an alternative process called the Simplified Determination method. When the health plan does not apply for a retiree drug subsidy (RDS) or have a retiree employer group waiver plan (EGWP), the current simplified determination process can continue to be used for both calendar years 2025 and 2026.
2025 Changes to Creditable Coverage Process
The Inflation Reduction Act of 2022 (IRA) made several improvements to Medicare Part D coverage effective in 2026, including lowering the annual out of pocket limit and increasing the actuarial value, among others. These changes mean that some employer-sponsored prescription drug coverage previously calculated as creditable, may longer be.
On April 7, 2025, CMS released final guidance titled, “Final Calendar Year 2026 Park D Redesign Program Instructions”, detailing the methodology for determining creditable coverage after the changes made by the IRA. Beginning in calendar year 2026 and after, a revised simplified determination method may be used. CMS states, “Because of the changes made by the IRA to enhance the drug subsidy (DS) Part D benefit, we do not believe the existing simplified determination methodology meets this requirement; therefore, we developed a revised simplified determination methodology that non-retiree RDS group health plans may use to determine whether prescription drug coverage under their calendar year 2026 plans is creditable.”
With this new methodology, a group health plan provides creditable coverage if the prescription drug plan:
- Offers coverage for brand, generic, and biological prescription drugs, and
- Offers reasonable access to retail pharmacies, and
- Pays, on average, at least 72% (up from 60% currently) of participants’ prescription drug expenses.
For those employers offering more than one health plan, the creditable coverage determination must be made for each plan. It’s possible for employers who offer both a PPO and a high-deductible health plan (HDHP) with a health savings account (HSA) to have the PPO plan calculated as creditable, but the HDHP not creditable.
For fully insured plans, the insurance carrier may calculate if the plan is creditable or non-creditable. For self-funded plans, the third-party administrator (TPA) or pharmacy benefit manager (PBM) may determine creditability for an additional fee, or the employer can use the simplified method if they have been.
Key takeaways for employers
Employers should plan for the upcoming changes to their creditable coverage process with their consultants, TPAs, and insurance carriers. If making changes to their plan designs, they may need to review and revise their creditable coverage notices (see below under Additional Resources).
In addition, over the next two years, employers should note these dates:
- 2025: continue using the existing simplified method if they are not applying for the RDS.
- 2026: continue using the existing simplified method if they are not applying for the RDS. If they choose, employers may start to use the revised simplified method reflecting that the plan pays the higher threshold for prescription drug expenses of 72%.
- 2027: Employers are required to use the revised simplified method.
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Additional Resources
Disclosure to CMS Guidance and Instructions
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
