What To Do If The $2,000 Cap Jeopardizes Your Employer Drug Coverage

The Inflation Reduction Act has generated many initiatives to cut drug costs for Medicare beneficiaries. So, it’s possible that those past the age of 65 and still working probably don’t care about any of them. However, the IRA may have created a dilemma. Will the drug coverage incorporated into the employer group health plan still be considered creditable?

Creditable Drug Coverage and Employer Plans

Creditable means that the employer plan is expected to pay on average as much as the standard Medicare prescription drug plan. The Centers for Medicare and Medicaid Services has formulas and criteria for determining creditable coverage. If the employer coverage is creditable, the employees and their spouses with that coverage can delay enrollment in a Part D Medicare drug plan until retirement. There is a special enrollment period to sign up for a Part D standalone plan or a Medicare Advantage plan with prescription drug coverage, also known as an MA-PD plan. And there would be no penalties.

Continuing with employer drug coverage that is not considered creditable for 63 days or longer can lead to a penalty. It is 1% of the national base beneficiary premium for every month without creditable coverage. In 2025, that penalty amount will be 36.78 cents. The penalty amount changes every year and follows for as long as one is enrolled in Part D.

By law, sponsors of drug coverage must provide a written notice by October 15 every year to Medicare-eligible individuals (those past the age of 65 and those younger than 65 who qualify because of disability). This notice identifies whether the plan has creditable or non-creditable drug coverage. Every employee and spouse of Medicare age should save these creditable coverage disclosure notices. Employees approaching age 65 should ask for a copy of the current notice so they will know the status of the drug plan.

The IRA Changes

These are Inflation Reduction Act initiatives that will make it more difficult for plans to demonstrate creditable coverage, i.e., that they pay at least as much as a Part D drug plan.

As a result, it’s possible that some employer plans will no longer have creditable drug coverage. Employees and their spouses need to know by the Medicare Open Enrollment Period whether the coverage is creditable. If it is, they can continue the status quo and, if it’s not, things get interesting.

If Your Employer Coverage Is Not Creditable

First, determine whether you want to continue with the status quo, the non-creditable employer plan, or get a Part D drug plan. The decision comes down to two factors.

The first one is cost.

• If you opt for the status quo, you will face a late enrollment penalty forever. For example, continuing one year would add about $4.50 to your monthly drug plan premium in 2025.
• If you enroll in a Part D plan, there are costs. 1) You could pay monthly premiums. This year, those range from $0 to over $100 a month, depending on ZIP code, medications, and pharmacies. 2) Those who are considered higher-income beneficiaries pay Part D Income-related Monthly Adjustment Amount, known as IRMAA. The additional amounts this year range from $12.90 to $81 a month. These amounts can change every year. However, depending on your situation, you may not always be subject to IRMAA. 3) Once enrolled in Medicare, you are no longer eligible to contribute to a Health Savings Account (HSA) so you must stop contributions.

The second factor is benefit.

Determine whether the enhanced coverage you might gain will be worth the cost. Do this by checking out 2025 plans. (The Medicare Plan Finder will have all the information by mid-October.) Look for those IRA initiatives that could benefit you and may not be available in the employer plan (Part D vaccines, insulin, and $2,000 cap). And beginning in January 2025, those with Part D coverage will be able to spread out payments over the calendar year.

After a comprehensive cost-benefit analysis, you can make an informed decision. Basically, there are two choices.

1. Stay on the path.

There are some who will decide that facing the Part D penalty is a less bad option than paying the monthly premiums and IRMAA, and losing HSA contributions. It is also possible that the employer plan could improve and would no longer be considered non-creditable coverage.

2. Make a change.

These actions depend on current Medicare status.

• Those who are already enrolled in Part A can add a standalone Part D drug plan during the Open Enrollment Period, October 15-December 7. Coverage will begin January 1.
• Those not enrolled in Part A must first enroll. (Part A and/or Part B enrollment are required for Part D.) The most efficient way is through the Social Security website. Once Part A is effective, sign up for a Part D drug plan. Then, if necessary, stop HSA contributions.

The Notices Are Very Important

Based on my experience, way too many starting the Medicare enrollment process do not know whether their current drug coverage meets Medicare’s criteria or received a notice. Some don’t think it’s a big deal.

That laissez-faire attitude won’t cut it going forward. The Centers for Medicare and Medicaid Services shares the concerns about those who face unintended consequences of losing creditable drug coverage. However, there is no mechanism to waive a Part D late enrollment penalty for failing to pay attention.

Your Take-away Points

• Watch for a creditable coverage disclosure notice from your employer in October. Confirm that it reflects the impact of all the Part D enhancements.
• If you don’t get one, ask for one.
• If you continue with the employer coverage, make sure you get a notice every year and save them.
• If choosing not to continue with the employer drug coverage, don’t delay Part D enrollment.
• Know that this issue applies to any non-Medicare drug coverage, such as that provided through a retiree plan.

The determination of whether employer drug coverage is creditable has always been complex and misunderstood. Now, the IRA initiatives have increased not only that complexity but the importance of paying attention. And about that laissez-faire attitude: consider your goals and plans for your post-65 years. Take all of this seriously because the decisions you make, once you turn 65, will likely affect the rest of your life.