Background

Many Medicare-eligible participants are enrolled in employer-sponsored group health plans, usually as active employees. Group health plan sponsors must provide these plan participants with a Notice of Creditable Coverage informing them whether the plan is creditable, meaning it has an actuarial value that equals or exceeds the actuarial value of defined standard prescription drug coverage under Part D. If the plan is creditable, the employee does not need to take any action and may remain in the group health plan. However, if the coverage is non-creditable and a Medicare-eligible participant fails to enroll in a Part D plan, they can be subject to a higher Part D premium when they do enroll in Part D. Medicare-eligible participants would incur a late enrollment penalty if they experience a continuous period of 63 days during which they are enrolled in a non-creditable drug plan.

The Inflation Reduction Act made substantial improvements to the value of the standard Part D prescription drug benefit, as we discussed in our September 29, 2022 insight. Consequently, in the absence of additional guidance, group health plan coverage generally would have to be richer to meet the creditable coverage standard.

Impact on cost sharing

The chart below shows 2026 cost sharing for individuals in a standard Medicare Part D prescription drug plan, starting with no coverage at the top and ending with catastrophic coverage at the bottom.

Medicare Part D Cost Sharing in 2026

No Part D Coverage
Lasts until enrollee meets the $615 deductible¹

Initial Coverage
Begins after enrollee meets the $615 deductible; lasts until the $2,100 out-of-pocket threshold is reached²

Catastrophic Coverage
Begins after enrollee meets the $2,100 out-of-pocket threshold

¹ In 2025, the deductible is $590.
² In 2025, the threshold is $2,000.
³ EGWPs are permitted to design benefits during the initial coverage period in a design appropriate for their workforce but must still apply the deductible and new out-of-pocket annual maximum.  

Creditable coverage determination

When testing to determine whether a group health plan offers creditable coverage, plans have historically been able to use a simplified methodology, rather than performing an actuarial evaluation. (However, plans that receive money from the federal government under the Retiree Drug Subsidy (RDS) program still must perform the actuarial evaluation.)

In the final guidance, which was issued on April 7, 2025, CMS states 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 final guidance does not define what is considered “reasonable.”

CMS will permit group health plans that do not receive the RDS to use either the existing simplified determination methodology or the revised simplified determination methodology to determine whether prescription drug coverage under 2026 group health plans is creditable. This policy is applicable to 2026 only.

CMS expressed concern that it was important to minimize potential risks to Medicare-eligible participants who may no longer have creditable coverage through their group health plan because of the increase in the value of the Part D benefit. However, CMS stated that for 2027 testing, it intends to propose to no longer permit use of the existing simplified determination methodology. In 2027, plans would have to use either the revised simplified determination methodology or actuarial equivalence testing to determine creditable coverage.

Other Medicare news

In the same payment notice, CMS announced an effective growth rate of 9.04 percent — a calculation of increases in cost of services under traditional fee-for-service Medicare. Based on costs incurred during the entire year of 2024, the final rate was significantly higher than the proposed 5.93 percent rate in the 2026 Advance Notice.

The higher growth rate means that Medicare Advantage plans will receive a 5.06 percent payment increase in 2026. Plan sponsors that contract with a Medicare Advantage plan should consult with their professional advisors about the impact of that increase on their plans.

In a separate rule, CMS also finalized regulations that implement technical changes to the Medicare program. Notably, CMS withdrew its proposal to require Medicare Advantage plans to cover glucagon-like peptide 1 (GLP-1) medications for obesity treatment.

Action items

Plan sponsors will need to decide which creditable coverage determination methodology to use for 2026.