Understanding Medicare Part D Creditable Coverage

Employers are not required to offer creditable prescription drug coverage, but they are required to determine and communicate creditable (or non-creditable) status to eligible individuals. This information helps Medicare Part D eligible individuals make informed decisions about enrolling in Medicare Part D and avoid late enrollment penalties.

Determining Creditable Coverage Status

Prescription drug coverage is creditable if the actuarial value of the coverage equals or exceeds the actuarial value of Medicare Part D prescription drug coverage. Employers often rely on insurance carriers or third-party administrators (TPAs) to provide credible determinations. If such information is not provided, the employer must make the determination on their own.
Employers who do not apply for the retiree drug subsidy generally use the “simplified method” for determining whether prescription drug coverage is creditable. If a plan does not meet the criteria under the simplified determination method, the employer may assume the plan is non-creditable, or they may obtain an actuarial determination to confirm.

 

Simplified Method for Determining Creditable Status

For 2026 plan years, employers may choose to use either the existing simplified method or a revised simplified method for determining creditable status. See 2026 Final Part D Redesign Program Instructions here.

Revised Simplified Method (Available Beginning in 2026)

To be deemed creditable, the plan must meet the following criteria:

  1. Provide reasonable coverage for brand name and generic prescription drugs and biological products;
  2. Provide reasonable access to retail pharmacies; and
  3. Pay on average at least 72% of participants' prescription drug expenses.
Existing Simplified Method

To be deemed creditable, the plan must meet the following criteria:

  1. Provide reasonable coverage for brand name and generic prescription drugs;
  2. Provide reasonable access to retail pharmacies;
  3. Pay on average at least 60% of participants' prescription drug expenses; and
  4. Depending upon whether the plan is integrated (most plans are non-integrated):
    • A non-integrated drug plan must have either no annual benefit maximum or a minimum annual benefit of $25,000; OR have an actuarial expectation that the amount payable by the plan will be at least $2,000 annually per Medicare-eligible individual.
    • An integrated plan must: have a maximum annual deductible of $250; have either no annual benefit maximum or a minimum annual benefit of $25,000; AND  have a lifetime combined benefit maximum of at least $1 million.

Disclosure of Creditable Status to Eligible Participants

The creditable status of the plan must be disclosed to Medicare Part D eligible individuals who are eligible to enroll in the plan sponsor’s prescription drug plan. This includes employees, COBRA participants, retirees, as well as their spouses and dependents. Individuals are eligible for Medicare Part D if they are enrolled in either Medicare Part A or Part B and live in the service area of a Medicare Part D plan. Due to difficulties in identifying eligible individuals, many employers choose to provide the disclosure notice to everyone eligible for their prescription drug plan.

 

Timing

Employers often aim to distribute the notice by October 15 to align with Medicare's open enrollment period. However, CMS only requires that the notice be distributed within the 12 months prior to October 15. This means employers who provide the notice during open enrollment or upon initial eligibility are compliant.

The notice must also be provided when individuals are first eligible for prescription drug coverage. For example, when a new hire becomes eligible for the employer's plan. Additionally, employers must send a notice when prescription drug coverage ends, the creditable status of the plan changes, or upon request.

Many employers are unsure which plan year the notice should reference, especially when distributing it in the fall. If the creditable status for the upcoming plan year is unknown during open enrollment, employers should communicate the current plan year's status. If the status changes after renewal (e.g., for 2026), a follow-up notice must be sent to inform eligible individuals of the change.

 

Delivery Methods

CMS recommends employers mail paper copies. However, notices may be provided electronically if the DOL’s electronic delivery safe harbor is satisfied. Employers may provide a single notice to eligible individuals and their dependents residing at the same address. If the notice is incorporated with other information or notices (e.g., benefits booklet or enrollment packet), the disclosure should be on its own page and a prominent reference (in 14-point font) should be included on the first page of the materials listing the notice’s specific page number.

Reporting to CMS

In addition to individual disclosures, employers must report the creditable status of their coverage to CMS annually, within 60 days of the start of the plan year. This reporting is typically completed by the employer, rather than the insurance carrier or TPA. Information necessary to complete the reporting includes employer identification number, type of coverage, number of plan options, estimated number of Medicare-eligible individuals covered, and the date the notice was distributed to participants.

CMS has provided detailed reporting instructions available here.

 

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Posted in Compliance