Changes to Medicare Part D Under the Inflation Reduction Act

In this article, we'll discuss the impact of the Inflation Reduction Act of 2022 on employer-sponsored medical plans and Medicare Part D. We will also explore the crucial role of creditable coverage for older workers and highlight the key updates to the Medicare Part D benefit that will roll out this year.

Key Points

• Inflation Reduction Act: Changes to creditability of employer-sponsored medical plans.
• Tax Implications: Potential unfavorable tax consequences for older workers.
• Importance of Creditable Coverage: Allows workers to delay Medicare enrollment and avoid Part D late enrollment penalties.
• Next Steps: Employers should review the actuarial value of their medical plans to ensure the plans continue to meet creditable coverage requirements.

Due to changes outlined in the Inflation Reduction Act of 2022, many employer sponsored medical plans that historically demonstrated actuarial equivalence with Medicare Part D may no longer be considered creditable. This may result in unfavorable tax implications for older workers and may have a negative impact on employer sponsored plans. It is important to have your plan tested to make sure it still qualifies as creditable under the new requirements. This paper also provides an overview of the Part D benefit design and Part D enrollee cost-sharing changes beginning in 2025.

The Inflation Reduction Act of 2022, signed into law on August 16, 2022, contains several provisions to decrease prescription drug costs for people with Medicare as well as reduce drug spending by the federal government. This includes several modifications to the Medicare Part D drug benefit. The most significant changes involve implementing a $2,000 cap on out-of-pocket drug spending for enrollees in Medicare Part D plans and the elimination of the coverage gap in 2025. While these changes increase the value of the Part D benefit and aim to ease the burden on Medicare Part D beneficiaries, they also have the consequence of making it more difficult for employer sponsored plans to qualify as creditable coverage.

Why Does Creditable Coverage Matter for Older Workers?

Creditable drug coverage matters because it may allow members to delay enrolling in Medicare and avoid the Part D late enrollment penalty. This is becoming increasingly important as more people continue to work beyond age 65, when they first become eligible for Medicare enrollment. 

Medicare calculates the penalty by multiplying 1% of the “national base beneficiary premium” ($36.78 in 2025) by the number of full, uncovered months the member did not have Part D or creditable coverage. The monthly premium is rounded to the nearest $0.10 and added to the member’s monthly Part D premium.

For example, a 68-year-old working for a company that does not offer creditable drug coverage may have a penalty of 36 months x 1% x $36.78 or $13.20 per month upon their retirement. There is no cap on this penalty.

The lack of creditable coverage could be a factor in whether that employee continues working or retires knowing that the penalty increases every month they continue to work.

What Is the Part D Benefit Currently and What Will It Be in 2026?

Due to these changes, the value of Medicare Part D in 2026 could exceed the value of your employer sponsored plan, even if this has not previously been the case. Therefore, it is important to have your plans tested.

Simplified Methods or Actuarial Determination?

There are three different options for determining if a plan is creditable: 

The Simplified Method. CMS offers a simplified determination of creditable coverage status for plan sponsors if the prescription drug benefit option meets certain design and coverage requirements. To use the current Simplified method, the prescription drug plan must have a deductible no greater than $250 for prescription drugs. Therefore, high-deductible plans and prescription drug programs participating in the retiree drug subsidy (RDS) program are not eligible. The Simplified method has been protected for use in 2025 and 2026 but may not be permitted after 2026. 

Revised Simplified Method. This method is more closely aligned with the Actuarial Value method (described below). Plans are not required to use the Revised method for 2026, but this method could potentially become the new standard beginning in 2027. For a plan to pass under the Revised method at least 72% of participants’ prescription drug expenses (versus 60% under the existing methodology) are required to be paid by the plan to be considered creditable coverage. Therefore, if the plan can pass using the Revised method, it has a better chance of being creditable in the future than if it only passes the original Simplified method.  

Actuarial Value Method. This method is used by an actuary to determine the creditable coverage on an actuarial basis comparing the value of the plan to the value of the Part D plan. It uses an actuarial model which is a more robust method and must be used for high-deductible plans and plans applying for the RDS subsidy. If the plans pass the Actuarial Value method, then the Plan Sponsor can feel more confident that the plan will remain creditable in future years assuming no further legislative changes impacting Medicare Part D benefits.

What are the Next Steps?

If an employer provides prescription drug coverage to Medicare-eligible individuals, they must provide the annual creditable coverage disclosure notice to Medicare-eligible individuals before October 15, 2025. This notice is important because Medicare beneficiaries who are not covered by creditable prescription drug coverage and do not enroll in Medicare Part D when first eligible will likely pay higher premiums if they delay enrollment. Although there are no specific penalties associated with this notice requirement, failing to provide the notice may be detrimental to your employees. Model Notice Letters can be found on CMS.gov.

It is recommended that plan sponsors have a creditable coverage determination completed well before the October 15th deadline to leave enough time to make plan design changes if necessary.

Remember, if a plan was deemed creditable prior to 2026, that does not necessarily mean it will remain creditable on or after January 1, 2026. 

Plan sponsors are also required to disclose to CMS whether their prescription drug coverage is creditable.¹  The disclosure must be made to CMS on an annual basis, or upon any change that affects whether the coverage is creditable. At a minimum, the CMS creditable coverage disclosure notice must be provided at the following times:

• Within 60 days after the beginning date of the plan year.
• Within 30 days after the termination of the prescription drug plan.
• Within 30 days after any change in the creditable coverage status of the drug plan.

Plan sponsors are required to provide the disclosure notice to CMS through completion of the disclosure form on the CMS creditable coverage disclosure website.

Employers should ask their brokers if they have performed a creditable coverage review based on either the Simplified method or the Revised Simplified method. Please email your FuturePlan consultant if a creditable coverage determination by an actuary is needed.

Want to learn more? Please contact us with your questions: 866-929-2525 or at sales@futureplan.com. 

¹This disclosure requirement does not pertain to the Medicare beneficiaries for whom entities are receiving the Retiree Drug Subsidy (RDS).

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