Changes to Medicare Creditable Coverage in 2026: what you need to know

The Inflation Reduction Act of 2022 (IRA) significantly impacted Medicare Part D prescription drug coverage, and these changes are rippling through employer-sponsored health plans. Employers need to be aware of the new rules to ensure compliance and support their Medicare-eligible employees.

The core of the change: Higher Part D Value

Increased Out-of-Pocket Cap: Medicare Part D beneficiaries will have their annual out-of-pocket costs capped at $2,100 in 2026 (an increase from the $2,000 cap in 2025).
Impact on Employer Plans: This increased value of standard Part D benefits means employer-sponsored prescription drug plans must now provide richer coverage to be considered “creditable” – meaning the actuarial value of the employer’s plan is at least as good as the Part D standard. Many plans that were previously considered creditable may not be in 2026 due to these changes to Medicare Part D.

Why This is Important

Preventing Penalties for Employees: Medicare-eligible individuals (and dependents) who elect employer plans that do not provide creditable pharmacy coverage will have penalties when they do enroll in Part D Medicare. These penalties remain for the entire time they are enrolled in Part D.

How Is Creditability Calculated?

Before 2026: Using what is known as the Existing Simplified Method, plans would be deemed creditable if they covered, on average, at least 60% of participants’ prescription drug expenses.
For 2026 only: Employers who don’t receive a Retiree Drug Subsidy (RDS) can continue to use the pre-2026 method (“Existing Method”) or the method that will be required in 2027 (“Revised Method” – see below)
For 2027 and beyond: The Revised Simplified Method will be used.Under this method, coverage is creditable if it:
- Provides reasonable coverage for brand-name and generic prescription drugs.
- Offers reasonable access to retail pharmacies.
- Is designed to pay, on average, at least 72% of participants’ prescription drug expenses.

How Should Employers Respond:

Re-evaluate Creditable Coverage Status: Employers, especially those with High Deductible Health Plans (HDHPs) or plans that previously barely met the creditable coverage threshold, need to assess if their plans will remain creditable under the new rules.
Communicate with Medicare-Eligible Individuals:
- Provide the required annual notice of creditable or non-creditable coverage before October 15th, ahead of the Medicare Part D open enrollment period.
- If the plan’s status changes from creditable to non-creditable, employers should issue an updated notice within 30 days of the change.
- Consider providing additional communication, carefully avoiding language that encourages employees to drop employer coverage, as this could violate Medicare Secondary Payer rules.
Adjust Plan Designs: Employers may want to consider adjusting deductibles, out-of-pocket maximums, or member coinsurance to ensure the plan meets the new standards for creditable coverage. Employers are not required to provide creditable coverage to comply with the law.They are only required to communicate whether plans are creditable to Medicare eligible employees and dependents by October 15.
CMS Online Disclosure: Report the creditable coverage status of the plan to CMS within 60 days of the start of the plan year (March 1st for calendar year plans).

Key takeaways

The changes to Medicare Part D creditable coverage require employers to be proactive in assessing their prescription drug plans, considering whether plan adjustments are desired, and communicating clearly with Medicare-eligible employees to ensure they understand their coverage options and avoid penalties.

For OVD Clients

OVD will:

Disclose medical plan status during renewal.
Include the required notices in open enrollment materials.
File CMS Online Disclosure on your behalf.

Questions? Our dedicated team is here to help! Reach out to your OVD agent or contact us at info@ovdinsurance.com.

The information and suggestions contained in this material have been developed from sources believed to be reliable. However, Olivier VanDyk Insurance Agency accepts no legal responsibility for correctness or completeness of this material, or its application to specific factual situations.

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