The Centers for Medicare & Medicaid Services (CMS) requires employers to notify individuals eligible for Medicare Part D whether the employer’s prescription drug coverage is creditable. CMS defines “creditable coverage” as coverage which at minimum has the equivalent actuarial value of Medicare Part D coverage (“Part D”).
The purpose of the notification requirement is to assist Part D eligible individuals make an informed decision about initial enrollment in Part D.
Determining Creditable Coverage
Creditable/non-creditable coverage is determined by using one of two approaches permitted by CMS: the simplified determination method and the actuarial determination method.
Simplified Determination Method
Employer provided prescription drug coverage is “creditable” under the simplified determination method if the employer does not apply for the retiree drug subsidy and coverage meets certain plan design safe harbors. Due to recent changes in Medicare Part D, CMS introduced a revised simplified determination method that is meant to replace the current simplified determination method. The revised simplified determination method removes some plan design criteria while adding coverage requirements for biological products and increasing the average covered expenses from 60% to 72%.
For 2026, CMS will allow use of either the revised or current simplified determination. Since either the revised or current simplified method can be used, there is minimal expected disruption for those using the simplified method to determine creditable coverage status. The revised simplified determination may have a bigger impact in the future when it entirely replaces the current simplified determination method.
Actuarial Determination Method
Prescription drug coverage that is considered non-creditable under the simplified method may still be creditable under the actuarial determination method. Under the actuarial determination method, prescription drug coverage is considered creditable if the actuarial value of the coverage equals or exceeds the actuarial value of the defined standard prescription drug coverage using generally accepted actuarial principles and meeting CMS actuarial guidelines.
Disclosing Creditable Coverage Status
Once a plan has determined it’s creditable/non-creditable coverage status it must disclose its status.
Timing
The creditable/non-creditable coverage notice must be given at the following times:
- Annually prior to October 15th each year;
- Prior to an individual’s Initial Enrollment Period (IEP) for Part D, which is the period during which an individual is first eligible to enroll in Part D (which runs concurrently with an individual’s Medicare Part A & B eligibility period);
- Prior to the effective date of coverage for any Medicare eligible individual that joins the entity’s plan;
- Whenever the entity no longer offers prescription drug coverage or changes the coverage offered so that it is no longer creditable or becomes creditable; and
- Upon request by the Part D eligible member.
We do recommend that employers provide the notice to all participants in the plan, because it is difficult for an employer to know who may or may not be on Medicare or who will become eligible within the next 12 months. Remember, this notice is not only for employees, but also dependents, and Medicare is not just for those over 65. Click here for more information and the model notices.
In addition to providing notification to employees regarding whether the prescription drug coverage is “creditable” or “non-creditable”, employers must also disclose the same information to CMS. This disclosure must be submitted to CMS on an annual basis and whenever changes are made to the prescription drug coverage that would affect whether the coverage is creditable. This disclosure must be provided within 60 days after the beginning of the plan year.
Method
Notices do not need to be sent as a separate mailing and can be included with other plan participant information (enrollment/open enrollment materials). Plan sponsors may provide the disclosure electronically if the DOL electronic delivery requirements are met. These requirements allow the plan sponsor to provide the notice to plan participants that can access electronic documents at their regular place of work if they have access to the plan sponsor’s electronic information system on a daily basis as part of their work duties. If a plan sponsor provides the notice electronically, the plan participant must be informed that the participant is responsible for providing a copy to their Medicare eligible dependents covered by the prescription drug coverage.
If the disclosure(s) is included with other plan participant information, the disclosure must be prominent and conspicuous. This means that the disclosure notice portion of the document or a reference to the section in the document being provided to the individual that contains the required statement must be prominently referenced in at least 14-point font in a separate box, bolded, or offset on the first page of the provided plan participant information.
Example Language:
If you (and/or your dependents) have Medicare or will become eligible for Medicare in the next 12 months, a Federal law gives you more choices about your prescription drug coverage. Please see page xx for more details.
Key Takeaway:
Employers, as sponsors of the prescription drug plan, are responsible for determining and disclosing their prescription drug plan’s creditable or non-creditable coverage status. Employers with fully insured plans would be well served to check with their insurance carrier regarding their creditable coverage status. Employers with self-funded plans should check with their TPA or PBM regarding their creditable coverage status. If your carrier, TPA, or PBM cannot assist you with the determination, you can contact your M3 Team for assistance.
The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.
