Background

After they are initially eligible for Part D, Medicare beneficiaries may incur a late enrollment penalty if they experience a continuous period of 63 days during which they are not enrolled in prescription drug coverage that is “creditable,” meaning it has an actuarial value that equals or exceeds the actuarial value of defined standard prescription drug coverage under Part D. Group health plan sponsors must provide plan participants with a Notice of Creditable Coverage informing them whether the plan is creditable.

When testing to determine whether a group health plan is offering creditable coverage, plans have historically been able to use a simplified methodology, rather than performing an actuarial evaluation. This methodology was allowed to be used for 2025 coverage but will be revised for 2026 due to changes made in the Part D benefit by the Inflation Reduction Act.

The Inflation Reduction Act made significant changes to the Part D prescription drug benefit that increased the value of the benefit, meaning generally that group health plan coverage would have to be richer to meet the creditable coverage standard.

The proposed guidance

In the proposed guidance, which was issued on January 10, 2025, CMS clarifies that plans that cover active employees may use a revised “simplified determination methodology” for determining creditable coverage for 2026. Under the revised simplified determination methodology, group health plan coverage will be creditable if it meets the following standards:

• Provides reasonable coverage for brand-name and generic prescription drugs and biological products
• Provides reasonable access to retail pharmacies
• Is designed to pay, on average, at least 72 percent of participants’ prescription drug expenses (versus 60 percent under the previous methodology)

The proposed guidance does not define what is considered “reasonable.”

Plans that do not receive the Retiree Drug Subsidy (RDS) may use either the simplified determination methodology or an actuarial equivalence determination. The simplified determination methodology may not be used by plans that apply for the RDS.

Key changes to the simplified determination methodology are the increase in value from 60 to 72 percent to reflect the higher-value Part D standard benefit. Also important to watch is the requirement that plans provide coverage for brand-name, generic and biological products. Biological products were added to reflect the changing nature of the prescription drug market. CMS also removed any requirements for certain deductibles, which may be more favorable to high-deductible health plans that may not have met the previous calculation.

Comments sought

CMS sought comments on whether:

• The revised simplified determination methodology will be useful to plan sponsors
• Plans expect to pass the test
• The test will have the impact of allowing more individuals to remain in their employment-based group health plan coverage rather than having to enroll in Medicare Part D, or face a penalty

Implications for plan sponsors

Plans that test for creditable coverage for active employees will be able to use a revised simplified determination methodology for 2026, which means taking a fresh look at their prescription drug benefits, as previous tests will no longer be available. The simplified determination methodology should result in fewer plans being found to not have creditable coverage. Consequently, it is unlikely that participants could be forced to enroll in Medicare to avoid paying a late enrollment penalty.

The revised simplified determination methodology will not affect plan sponsors that receive the RDS or those that provide benefits through a Part D or Medicare Advantage Prescription Drug Plan.

Final guidance is expected in April 2025. Plan sponsors should closely watch whether any changes are made in the final guidance, which was issued before the change in administration.