Medicare Upgrades Could Disqualify Your Private Plan

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Still working past age 65 and relying on your employer's health plan rather than Medicare? This is for you.

Upgrades coming to Medicare prescription drug coverage under the Inflation Reduction Act may actually cause problems for some people who delay enrolling in Medicare because they are covered by employer health insurance, although the Centers for Medicare and Medicaid Services says it will delay making any changes until at least 2026.

The issue relates to penalties assessed against Medicare beneficiaries who enroll later than their initial eligibility dates.

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If you are employed in a job that provides health insurance past age 65, you can delay signing up for Medicare without penalty, as long as certain conditions exist. In the case of prescription drug coverage, the plan has to pay on average as much as the standard Medicare prescription drug coverage.

With improvements coming to Part D going into effect Jan. 1, 2025, some employer plans that qualified as “creditable” because their benefits were at least as good as those offered by Part D before the changes may no longer be accepted as equivalent to Medicare. For instance, starting Jan. 1, the out-of-pocket maximum under Part D will be $2,000 a year.

Generally, if a private plan isn't considered equivalent to Part D, the policy may not suffice as a substitute allowing beneficiaries to delay enrolling in Part D without a penalty.

CMS says it is evaluating the impact the Inflation Reduction Act (IRA) has on these determinations and will not disqualify private plans that are currently considered creditable, for now. The agency tells Kiplinger: “In basic terms, if a health plan’s prescription drug benefit was determined to be creditable in 2024 … it should continue to be considered creditable in 2025, as long as it continues to meet the criteria.”

CMS added that it “is evaluating the continued use of the existing creditable coverage simplified methodology, or establishing a revised one, for plan year 2026, based on the recent changes to the standard Part D benefit made by the IRA.”

So if your plan is considered a satisfactory substitution for Medicare Part D now, it should also work that way in 2025.

In addition, if a Medicare-eligible person delays enrollment in both Part A and Part B, CMS says they’re not eligible for Part D, and therefore, “they would not be subject to a future Part D late enrollment penalty for the period of time they delayed Part A and Part B.” This applies only to people who are not eligible for Part A, according to CMS, which adds that "most people are entitled to premium-free Part A."

The late enrollment penalty is imposed every month you are enrolled in Medicare if, at any time after your Initial enrollment period, there's a period of 63 or more days in a row when you don't have Medicare drug coverage or other creditable prescription drug coverage.

Medicare calculates the penalty by multiplying 1% of the "national base beneficiary premium" ($34.70 in 2024) times the number of full, uncovered months you didn't have Part D or creditable coverage. The monthly penalty is rounded to the nearest $.10 and permanently added to your monthly Part D premium.

The law requires insurers to notify Medicare-eligible policyholders whether their prescription drug coverage is creditable coverage. But if your employer or insurer hasn’t notified you, you should inquire in time to plan your coverage decisions when Part D changes.

Editor’s note: This article has been updated to clarify the timing on changes to creditable coverage determinations.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

Elaine Silvestrini has worked for Kiplinger since 2021, serving as senior retirement editor since 2022. Before that, she had an extensive career as a newspaper and online journalist, primarily covering legal issues at the Tampa Tribune and the Asbury Park Press in New Jersey. In more recent years, she's written for several marketing, legal and financial websites, including Annuity.org and LegalExaminer.com, and the newsletters Auto Insurance Report and Property Insurance Report.