IRA Part D Redesign Lifts Creditable Coverage Bar to 72%, Putting Employer Drug Plans at Risk

From modeling employer drug benefit designs against the new 72% actuarial value threshold, the number of high-deductible health plans that will fail the revised simplified determination test is likely significantly higher than most employers currently anticipate. The transition year allowance for 2026, which lets non-RDS plans use either the old 60% or the new 72% standard, is masking the scale of the problem. When the old method is retired for plan years beginning in 2027, the compliance cliff will force benefit redesigns, contribution increases, or a wave of creditable-to-non-creditable status changes that trigger permanent late enrollment penalties for Medicare-eligible employees who do not enroll in Part D.

The Inflation Reduction Act of 2022 restructured the standard Medicare Part D benefit in ways that made it substantially richer for beneficiaries. The coverage gap (the "donut hole") was eliminated entirely as of January 1, 2025. An annual out-of-pocket cap of $2,000 replaced the old structure where beneficiaries could face unlimited catastrophic-phase cost sharing at 5% of drug costs. For 2026, that cap rises to $2,100 under the annual percentage increase adjustment. Once a beneficiary hits the cap, cost sharing drops to zero for the rest of the year.

These changes made the standard Part D benefit significantly more valuable on an actuarial basis. CMS recognized that the old 60% actuarial value threshold for the simplified creditable coverage determination, set when Part D still had a donut hole and 5% catastrophic coinsurance, no longer reflected the enriched benefit. On April 7, 2025, CMS finalized the CY 2026 Part D Redesign Program Instructions, establishing a revised simplified determination method with a 72% actuarial value threshold. The agency calculated the new threshold using 2023 Part D claims experience adjusted to projected 2026 benefit levels.

60% → 72%

Actuarial value threshold increase under the revised simplified determination method for CY 2026

73%

Projected threshold for CY 2027, when the old 60% method will no longer be available

$2,100

Part D annual out-of-pocket cap for 2026 (up from $2,000 in 2025), the structural change driving the threshold increase

56.1M

Total Medicare Part D enrollment as of February 2026 (KFF), up from 54.6 million in 2025

How Creditable Coverage Determinations Work

Prescription drug coverage is "creditable" when its actuarial value equals or exceeds the actuarial value of the standard Medicare Part D benefit. The determination matters because Medicare-eligible individuals who go 63 or more continuous days without creditable coverage after their Initial Enrollment Period face a permanent late enrollment penalty when they eventually enroll in Part D. The penalty is calculated as 1% of the national base beneficiary premium ($38.99 for 2026) multiplied by the number of full uncovered months, and it is added to the individual's Part D premium for life.

Employers have three methods for determining whether their prescription drug coverage qualifies as creditable. The first is the existing simplified determination method, which requires the plan to meet several criteria including covering both brand and generic drugs, providing reasonable access to retail pharmacies, and being designed to pay on average at least 60% of participants' prescription drug expenses. The second is the revised simplified determination method, introduced by the CY 2026 program instructions, which uses the same structural criteria but raises the actuarial value floor to 72%. The third is a full actuarial equivalence test, which compares the employer plan's expected paid claims directly against the standard Part D benefit using actuarial modeling. Plans that receive the Retiree Drug Subsidy (RDS) from CMS must always use the actuarial equivalence method.

The revised simplified method also modernizes the test by removing parameters that became obsolete after the ACA, including references to annual and lifetime benefit maximums and separate deductible thresholds. This cleanup is welcome, but the 12 percentage point jump in the actuarial value floor is the change that will force plan redesigns.

The 2026 Transition Year and the 2027 Cliff

CMS built a one-year bridge into the final program instructions. For CY 2026 only, non-RDS group health plans may use either the existing simplified determination methodology (60% threshold) or the revised methodology (72% threshold). An employer whose plan passes the old 60% test can still certify its coverage as creditable for 2026 plan years without running the new 72% analysis.

The bridge ends in 2027. CMS has stated its intent to propose eliminating the existing simplified determination methodology for plan years beginning in CY 2027 and beyond. At that point, employers will have two options: pass the revised simplified method at a projected 73% threshold, or conduct a full actuarial equivalence test. The actuarial equivalence test is more granular and can sometimes demonstrate creditability for plans that fail the simplified method, but it is also more expensive (requiring an actuary to model the comparison) and more sensitive to assumptions about member demographics, drug utilization mix, and formulary design.

The practical effect is that many employers coasting through 2026 on the old 60% standard are not yet confronting the redesign work their plans will need. Brown & Brown's analysis of the final program instructions warns that "these changes could cause many existing employer-sponsored plans considered creditable in 2024 or 2025 to no longer meet minimum requirements in 2026, subject to an actuarial review." Hylant's compliance advisory reinforces this, noting that plans with "higher member cost-sharing, particularly HDHPs" face the greatest risk of failing the new threshold.

Which Employer Plans Are Most Vulnerable

The plans most at risk divide into three categories, each with different actuarial dynamics.

HSA-compatible high-deductible health plans. These are the single largest category of vulnerable plans. The IRS minimum deductible for HSA-compatible HDHPs is $1,650 for self-only coverage and $3,300 for family coverage in 2026. A family-tier HDHP applies a deductible that exceeds the $2,100 Part D out-of-pocket maximum by more than $1,000. EHD Insurance's analysis of the CMS update identifies this structural mismatch directly: "because the HDHP minimum deductible for other-than-self-only coverage is higher than the $2,000 Part D out-of-pocket maximum introduced by the IRA, all HSA-compatible HDHPs will potentially lose creditable coverage status for 2026."

From a modeling perspective, the problem is straightforward. The HDHP applies its full deductible to prescription drugs (with limited exceptions for preventive medications under safe harbor rules), meaning the plan pays nothing on drug claims below the deductible. Once the deductible is satisfied, the typical HDHP applies 20% to 30% coinsurance. Against a Part D benefit that now has a $615 deductible, 25% coinsurance in the initial coverage phase, and zero cost sharing once the $2,100 cap is reached, the HDHP's expected paid claims percentage on prescription drugs falls well below 72% for most utilization distributions.

Plans with high drug-specific cost sharing. Beyond HDHPs, conventional PPO and HMO plans that impose steep prescription drug copays, high specialty tier coinsurance (typically 30% to 50%), or separate drug deductibles above $500 are at risk. The enriched Part D benefit with its hard $2,100 out-of-pocket cap means that any employer plan with material cost sharing on high-cost drugs will struggle to match the standard benefit's actuarial value, particularly for members who use specialty medications.

Plans with narrow or restrictive formularies that steer to generics. Plans that aggressively manage formularies through step therapy, prior authorization, and mandatory generic substitution may show strong actuarial value for members who use generic drugs but poor actuarial value relative to Part D for members who need brand-name or specialty medications. The simplified determination method evaluates creditable status across the full participant population, not just the generic-heavy majority. A plan that covers generics well but imposes 40% coinsurance on non-preferred brands may fail the 72% test when the utilization distribution is blended.

Quantifying the Actuarial Value Gap

The 12 percentage point jump from 60% to 72% is not incremental; it represents a fundamental shift in how much of participants' drug costs employer plans must cover to remain creditable. Consider a stylized example that illustrates the math facing health actuaries modeling employer plans against the new standard.

Plan Design Element	Typical HDHP	Standard Part D (2026)
Deductible	$3,300 (family)	$615
Coinsurance after deductible	20% to 30%	25% (initial coverage phase)
Out-of-pocket maximum	$8,050 (family, IRS limit)	$2,100
Cost sharing after OOP max	$0	$0
Annual/lifetime maximums	None (ACA)	None

Under the old Part D benefit with the coverage gap and 5% catastrophic coinsurance, the employer HDHP's actuarial value for prescription drugs could clear the 60% bar for many member populations because Part D itself had significant cost-sharing gaps. The donut hole alone meant Part D beneficiaries were responsible for a large share of drug costs in that range. Now that Part D eliminates the gap and caps total out-of-pocket at $2,100, the standard benefit's actuarial value has increased substantially, and the employer plan's drug actuarial value has not changed. The same HDHP design that passed at 60% now needs to demonstrate it covers at least 72% of drug expenses to pass the revised simplified method.

For a member population with average annual prescription drug costs of $5,000, the HDHP with a $3,300 deductible and 20% coinsurance after deductible would pay approximately $1,360 (covering ($5,000 - $3,300) x 0.80 = $1,360). That represents an actuarial value of roughly 27% on drug spending, far below the 72% threshold. Even with preventive drug safe harbors carving out some medications from the deductible, the math is difficult.

EHD Insurance recommends that HDHPs attempting to maintain creditable status should: not apply a deductible to preventive and maintenance medications, use a reasonable and supportable allocation of the HDHP deductible attributable to prescription drug expenses (rather than the full deductible), and offer lower cost sharing than standard Part D once the deductible is met. The deductible allocation approach is the most promising avenue, because HDHPs cover both medical and pharmacy claims under a single combined deductible, and the portion attributable to pharmacy is typically a fraction of the total. But the allocation methodology must be defensible under actuarial standards, and auditors and regulators may challenge aggressive splits.

Downstream Effects on Medicare-Eligible Employees

When an employer plan loses creditable coverage status, the consequences cascade to every Medicare-eligible individual enrolled in that plan. The core risk is the Part D late enrollment penalty. An individual who relies on non-creditable employer coverage instead of enrolling in Part D accumulates uncovered months. For each full month without creditable coverage, the penalty is 1% of the national base beneficiary premium, currently $38.99 per month for 2026. The penalty is permanent and compounds over time as the base premium increases annually.

A Medicare-eligible employee who stays on non-creditable employer coverage for five years (60 months) would face a monthly penalty of approximately $23.40 (60% of $38.99), added to their Part D premium for the rest of their life. Over a 20-year retirement, that penalty totals roughly $5,616 in additional premium payments, not accounting for annual base premium increases that would make the actual figure higher.

Employers are required to provide written disclosure notices to all Medicare-eligible individuals covered under their prescription drug plan prior to October 15 each year (before Medicare Open Enrollment begins). The notice must state whether coverage is creditable or non-creditable, explain what creditable coverage means, and describe the consequences of not enrolling in Part D. If a plan changes from creditable to non-creditable mid-year, the employer must issue a new notice within 30 days.

The timing creates a practical problem. Employers that coast through 2026 on the old 60% standard and then fail the new 72%/73% threshold for their 2027 plan year will need to notify Medicare-eligible employees of the status change in advance of the October 2027 Medicare Open Enrollment period. That gives those employees a window to enroll in Part D. But employees who have been relying on what they believed was adequate employer coverage may have accumulated several years of uncovered months under the assumption that their employer plan was creditable, only to learn that it no longer qualifies.

The Retiree Drug Subsidy Context

The Retiree Drug Subsidy (RDS) program, through which CMS subsidizes employer-sponsored retiree drug plans, has been in structural decline for over a decade. RDS participation covered approximately 20% of Part D enrollment in 2010; Medicare Trustees project the share will fall to 1.5% by 2032. The decline accelerated after the ACA's 2013 elimination of the tax deduction for RDS payments, and the trend toward Employer Group Waiver Plans (EGWPs) has provided a more favorable economic alternative for many employers.

For the remaining RDS plans, the creditable coverage threshold change is less directly relevant because RDS plans were always required to use the full actuarial equivalence test rather than the simplified method. However, the Part D benefit enrichment still raises the bar for equivalence testing, as the standard benefit against which employer plans are compared is now substantially more generous. Health actuaries working on RDS equivalence certifications for 2026 and 2027 need to update their standard Part D benchmark to reflect the enriched benefit structure, including the $2,100 out-of-pocket cap and zero catastrophic cost sharing.

What Health Actuaries Should Model Now

From tracking the compliance advisory literature and modeling benefit designs against the revised threshold, several priorities emerge for health actuaries advising employer clients.

Run both tests for 2026. Even though employers can use the old 60% standard for 2026, running the revised 72% test now reveals which plans will fail in 2027 and gives employers a full year to redesign benefits. Waiting until mid-2027 to discover a plan fails the new test leaves inadequate time for benefit redesign, employee communication, and enrollment coordination.

Model the pharmacy deductible allocation for HDHPs. The most defensible approach for maintaining HDHP creditable status is to allocate the combined deductible between medical and pharmacy claims based on the plan's actual claims experience or a reasonable actuarial estimate. If the plan's historical pharmacy claims represent 25% of total claims, the allocated pharmacy deductible for a $3,300 family plan would be approximately $825, which materially changes the actuarial value calculation compared to applying the full $3,300 deductible to the drug benefit test. Document the allocation methodology and the data supporting it.

Consider the full actuarial equivalence test as a backstop. Plans that fail the simplified 72% test may still demonstrate creditability through the more granular actuarial equivalence analysis. This is particularly true for plans with strong formulary management, high generic dispensing rates, or favorable member demographics (younger, healthier populations with lower specialty drug utilization). The actuarial equivalence test allows for plan-specific assumptions that the simplified method cannot accommodate.

Evaluate benefit redesign options. For plans that will fail both tests, the employer faces a choice: redesign the drug benefit to clear the threshold, or accept non-creditable status and communicate accordingly. Benefit redesign options include adding a separate, lower pharmacy deductible within the HDHP structure (where IRS safe harbor rules allow it for preventive drugs), reducing specialty tier coinsurance, or introducing copay-based drug tiers alongside the deductible structure. Each option has cost implications that need modeling against expected utilization.

Build the communication timeline. Employers that will change creditable status for 2027 plan years need to begin employee education well before October 2027. Medicare-eligible employees need time to evaluate their options, including enrolling in a standalone Part D plan during Medicare Open Enrollment (October 15 to December 7) or switching to a Medicare Advantage plan with drug coverage. The fiduciary and reputational risk of delayed communication is significant, particularly for large employers with substantial retiree or age-65-plus active employee populations.

Monitor the CMS rulemaking for 2027. CMS stated its intent to propose eliminating the old simplified determination method for 2027, but the formal rulemaking has not yet been finalized as of May 2026. The 73% threshold for 2027 is CMS's current projection based on the annual actuarial value recalculation. Health actuaries should track the proposed rule (expected in the CY 2027 Part D program instructions, typically released in spring) for any adjustments to the threshold, the transition timeline, or the simplified method criteria.

Why This Matters for Actuaries

The creditable coverage threshold change is one of the quieter downstream effects of the IRA's Part D redesign, but it may affect more employers than any other single provision. The consumer-facing story of the Part D redesign is the $2,000 out-of-pocket cap, which benefits approximately 11 million Part D enrollees annually according to ASPE estimates. The employer-facing story is this: the same benefit enrichment that helps Part D beneficiaries raises the bar for every employer plan that needs to match it.

The 56.1 million Americans enrolled in Part D as of February 2026 includes millions who hold employer-sponsored prescription drug coverage and are either currently Medicare-eligible or approaching eligibility. For those individuals, the creditable status of their employer plan directly determines whether they face a permanent financial penalty when they eventually transition to Medicare. The stakes are real, and the 2026 transition year is the window for health actuaries to identify vulnerable plans and get ahead of the 2027 compliance cliff.

Patterns we have seen in recent employer benefit consulting engagements suggest that awareness of the threshold change is concentrated among large employers with dedicated benefits teams and actuarial consultants. Mid-market employers (500 to 5,000 employees), many of which rely on broker guidance rather than internal actuarial analysis, appear less prepared. The gap between large-employer readiness and mid-market awareness is a risk concentration that health actuaries in the consulting space should be addressing proactively.