Reminder: Medicare Part D Changes May Cause Some Employer Plans to Lose Creditable Coverage Status for 2026 and 2027

Employers that provide prescription drug coverage to Medicare‑eligible individuals should be aware of significant CMS changes that may affect whether their coverage remains “creditable” in 2026 and 2027. These changes stem from the Inflation Reduction Act of 2022 (IRA) and CMS’s redesign of Medicare Part D, which could alter whether certain employer plans continue to qualify as creditable coverage.

In the Final Part D Redesign Program Instructions, CMS revised one method for determining whether coverage is creditable. It’s called the “simplified determination” method. This method was revised to better reflect actuarial equivalence with the enhanced Part D benefit design under the IRA. For group health plan sponsors who are not applying for the Retiree Drug Subsidy (RDS), the following applies:

• 2026 plan year renewals are permitted to use either the prior simplified determination methodology or the revised simplified determination methodology to determine whether their prescription drug coverage is creditable.
• 2027 plan year renewals and beyond can no longer use the prior simplified determination methodology and must use the revised simplified methodology.

What Is “Creditable Coverage”? Why Does It Matter?

Employer plans that offer prescription drug benefits must determine each year whether their coverage is creditable, meaning it is expected to pay, on average, at least as much as standard Medicare Part D coverage. This is demonstrated using the generally accepted actuarial principles and in accordance with CMS guidelines.

This determination is critical because:

• Medicare‑eligible individuals rely on it to decide whether to enroll in Medicare Part D.
• Incorrect disclosures can result in late enrollment penalties for employees and retirees, even though CMS does not impose direct employer fines.
• Employers have ongoing CMS disclosure obligations tied to this status.

For plans with multiple benefit options (e.g., PPOs, HDHPs and HMOs), the creditable coverage test must be completed separately for each benefit option. For coverage beginning on or after January 1, 2027, account-based plans, such as health reimbursement arrangements (HRAs), health flexible spending accounts (FSAs), and health savings accounts (HSAs), are exempt from creditable coverage disclosure requirements.

What Changed Under Medicare Part D?

Beginning in 2025, Medicare Part D was redesigned to include an annual out-of-pocket cap and a simplified cost-sharing structure. In 2026, the redesigned benefit continues, with a $2,100 annual out‑of‑pocket limit (indexed from the 2025 $2,000 cap) and elimination of the coverage gap and catastrophic coinsurance phases.

As a result, CMS updated the simplified determination methodology that many employer plans rely on to establish creditable coverage. The revised methodology increases the actuarial value threshold that employer coverage must meet, meaning some plans that qualify today may not qualify in the future without changes.

Under existing CMS guidance, there are several ways an employer can determine whether its prescription drug coverage is creditable:

• As a first step, employers with fully insured prescription drug plans should confirm with their carriers whether the plan’s prescription drug coverage is creditable and will continue to be creditable.
• For self-funded plans, or where the carrier for an insured plan has not made a determination about whether the plan is creditable, employers may use a simplified determination—as long as the coverage meets certain design requirements.
• If the coverage does not meet certain design requirements, the employer must use the actuarial determination method.

If an employer chooses to use the simplified determination method, under the revised methodology the group health plan coverage must be designed to pay, on average, at least 72% of participants’ prescription drug expenses (versus 60% under the prior methodology) to be considered creditable coverage.

For plan year renewals in 2027 and beyond, CMS will no longer permit use of the prior simplified determination methodology. For 2027, the revised methodology requires plans to pay, on average, at least 73% of a participant’s drug expenses to be considered creditable, with CMS establishing updated percentages for later years through sub-regulatory guidance.

More information and resources on the IRA’s changes to Medicare Part D are available on CMS’s Part D Improvements webpage.

What Is the Employer Key Takeaway?

Employers should become familiar with the revised creditable coverage determination method applicable for 2026 and 2027, and do the following:

• Confirm with the carrier or vendor that the prescription drug coverage is creditable or not creditable in advance of the plan year renewal to prepare and distribute the appropriate Medicare Part D disclosure notices.
• Determine if the plans that currently qualify as creditable using the simplified method continue to meet the revised standard without plan design changes.
• Use the actuarial determination method if the simplified method cannot be applied due to plan design requirements.

Although CMS does not impose direct penalties on employers for failing to offer creditable coverage, the downstream consequences can be significant. Medicare‑eligible participants who are incorrectly told their coverage is creditable may face late‑enrollment penalties if they delay Medicare Part D enrollment, creating employee relations and fiduciary concerns for plan sponsors.

Reach out to your Hylant representative for further information. Don’t have one? Contact us here.

The above information does not constitute advice. Always contact your employee benefits broker or trusted advisor for insurance-related questions.