Have You Received Your Rx Creditable Coverage Letter?

Employers are required to notify certain enrollees in writing whether their drug plan is rich enough to avoid lifetime Medicare surcharges.

If you're age 65 or older and covered on a group medical plan, you should receive a letter from your plan sponsor telling you whether you prescription-drug benefit meet Medicare Creditable Coverage (MCC) requirements. Mine arrived by mail Monday. This information is relevant if you plan to defer enrollment in Part D around your 65th birthday.

The decision to defer is highly personal. If you want to continue to fund your Health Savings Account, you must defer enrollment in any Part of Medicare. But more than half of all Americans turning age 65 don't have a choice to continue funding a Health Savings Account or enrolling in Medicare. They begin to collect Social Security benefits before they reach age 65. Under current Medicare rules, they're auto-enrolled in Medicare Part A (inpatient, home-health, and hospice care). At that point, most who are funding a Health Savings Account up to age 65 seriously consider disenrolling from their HSA-qualified plan and instead pick up Medicare Part B (outpatient coverage) and Part D (prescription-drug plan).

But for those who can remain HSA-eligible at age 65, the decision may not be clear-cut.

Medicare Part D and Penalties for Late Enrollment

Part D became part of the Medicare program through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (a law that, coincidentally, also created Health Savings Accounts). Part D plans are sold by private companies that are approved and regulated by Medicare. Plans have different formularies (prescriptions may be covered on different tiers of financial responsibility) and participating pharmacies. Premiums differ as a result.

People who enroll as of the month of their 65th birthday never face a lifetime penalty (permanent premium surcharge) for having pre-Medicare coverage that's not as rich as Part D (a concept called Medicare Creditable Coverage, or MCC). But if they delay enrollment, they could be subject to a lifetime penalty equal to 1% of the national base beneficiary premium, a complex topic that, loosely defined, is the base amount on which insurers build the premium for their specific Part D plans. In 2024, the national base beneficiary is $34.70

Example: Rondell delays enrollment in Medicare until three full years after he turned age 65. His coverage wasn't MCC. He chooses a Part D plan with a $50 monthly premium. He will pay an additional $12.49 (36 months = 36% of the national base beneficiary premium of $34.70, or $12.49). This surcharge will vary year-to-year as the national base beneficiary premium changes.

Because prescription drugs are applied to the deductible on all HSA-qualified plans, patient cost-sharing is generally higher than on plans that cover prescriptions subject to copays and coinsurance. Thus, a Health Savings Account owner actively funding her Health Savings Account after her 65th birthday by delaying Medicare enrollment is more likely to pay the Part D lifetime surcharge than a contemporary who enrolls in Medicare in the month of her 65th birthday or remains covered after her 65th birthday on a plan with lower prescription-drug cost-sharing.

Determining Creditable Coverage

Insurers test their prescription-drug riders annually, applying their claims experience to a formula published by the Centers for Medicare and Medicaid Services, to determine whether the plan meets the MCC standard. They then inform employers, who are then required to inform at least the portion of their covered population (employees and dependents) who are enrolled in Medicare of their determination.

As a rule of thumb, HSA-qualified plans with deductibles near the statutory minimum ($1,600 for self-only and $3,200 for family coverage in 2024) generally meet the MCC standard. As deductibles rise, more plans fail to meet the standard. A prescription-drug plan that covers preventive drugs below the deductible (often with a copay) is more likely to meet the MCC threshold than a plan that applies all prescription drugs to the deductible.

How to Avoid Part D Penalties

Individuals, and in some situations working seniors through efforts by their employers, can avoid Part D penalties. Here's how:

Enroll in MCC coverage once you reach age 65. You can make sure that your prescription drug plan meets MCC requirements from the month of their 65th birthday until they enroll in Medicare. This strategy may require you to switch to a non-HSA-qualified plan at open enrollment during the plan year that you turn age 65. Note: Turning age 65 mid-plan year and wanting to switch plans to avoid the Part D premium surcharge is not a qualifying event to change your coverage mid-year.

Note: Your prescription-drug coverage prior to age 65 does not affect whether you pay a premium surcharge if you enroll in Part D.

Enroll in Medicare when first eligible. If you enroll in Medicare Part D as of the first day of the month that you turn age 65 (or the first day of the prior month if your birthday is on the first day of the month), by definition you never have a period of Medicare eligibility in which your coverage isn't MCC.

Ask your employer to test your plan. Insurers test their prescription plans to determine whether they're creditable. That may not be the final word, however. Insurers test the prescription rider that they sell. But your company may integrate a Health Reimbursement Arrangement with its HSA-qualified plan that reduces your prescription cost-sharing. Your insurer doesn't test for this additional benefit, but the HRA may reduce your prescription costs below what they would be absent this arrangement.

Example: Audrey's insurer tests the pharmacy benefit on her HSA-qualified plan with a $4,000 deductible and determines that it doesn't mee the MCC standard. But her company integrated a $2,400 Post-Deductible Health Reimbursement Arrangement with the plan to reduce her net deductible to $1,600. This benefit design may meet the standard. Her company can demonstrate that its plan exceeds the MCC threshold only by hiring an independent actuary firm to apply the CMS-approved formula to this combination of medical plan and integrated HRA.

A company should consider independent testing when its insurer determines that the drug rider doesn't meet the MCC standard but an additional company-funded benefit reduces the cost of prescription drugs.

Health Savings Account contributions by the company, even if they cover the entire plan deductible, are not relevant when testing the plan. The test applies only to all forms of coverage. An HRA is an employer-sponsored medical plan. A Health Savings Account contribution isn't, even if the dollar value would otherwise satisfy the MCC standard.

Accepting the Penalty

Does it make sense financially to delay enrollment in Medicare, remain covered on a plan that's not MCC, and continue to fund a Health Savings Account?

Maybe. A Health Savings Account owner should consider carefully the financial effect of enrolling in Medicare at age 65 to avoid future premium surcharges or delay enrollment to continue to fund his account.

Example: Jonny plans to work until age 70. His drug plan doesn't meet the MCC threshold. He contributes $9,300+ annually (the 2024 statutory minimum annual deductible is $9,300 and will rise with inflation, plus a $1,000 catch-up contribution) to his Health Savings Account for 50 months between age 65 and his loss of eligibility due to retroactive Part A coverage. During this time, he contributes about $40,000 to his Health Savings Account, which saves him about $1,400 in taxes. When he finally enrolls in Medicare, he pays a premium surcharge of 50% of the national base beneficiary premium. Let's say that figure rises to $44 by that time, which means that his monthly surcharge is $22 (or $264 annually) for a monthly premium of $66 (or almost $800 annually). Even with 5% annual inflation, the additional $40,000 contribution (assuming no growth from interest or investments) will reimburse the next 26 years' Part D premiums and surcharges.

Does it make sense financially to pay a surcharge if the net effect is that the additional contributions pay all Medicare Part D premiums until age 96? The answer may vary from person to person.

The point isn't whether it's the right or wrong decision to accept future premium surcharges in exchange for remaining eligible to fund a Health Savings Account. The point is to understand your options and make the right choice given your financial situation, health, and risk tolerance.

The Bottom Line

The intersection of Health Savings Accounts and Medicare is confusing. For people age 65 and older (and perhaps others covered on the plan), one aspect comes into focus every year in mid-October when insurers release the MCC letters. It's a good time to evaluate your options.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.