HSAs, HRAs, and Medicare Creditable Prescription Coverage

Medicare Minimum Creditable Coverage is a confusing topic. Let's demystify it and determine how it affects your future Part D premiums.

Unbeknownst to many Americans, you're not required by law to enroll in Medicare at age 65, the age at which you become eligible for coverage. You may take other actions (described below) that result in your mandatory enrollment in at least one Part of Medicare. But millions of Americans age 65 or older remain covered on an employer-sponsored medical plan and have deferred Medicare.

Among them, many do so because they want to remain eligible to fund a Health Savings Account. But what happens when this desire collides with a concept known as Medicare Minimum Creditable Coverage? Let's take a deep dive into this topic.

When You Can Enroll in Medicare

Medicare consists of Part A (inpatient, home-health, and hospice services), Part B (outpatient care), and Part D (prescription-drug coverage. Another option, Part C or Medicare Advantage, consists of private plans that cover these services.

Except for cases of disability, you become eligible to enroll in Medicare effective the first day of the month of their 65th birthday (or the first day of the prior month, if their birthday is on the first day of the month). You're not required by law to enroll then, however, unless you're collecting Social Security or Railroad Retirement benefits. In that case, you're automatically enrolled in Part A and Part B. You can waive Part B if you have other coverage, but Part A coverage is mandatory if you're receiving federal retirement benefits.

Part D Minimum Creditable Coverage

If you defer enrollment at age 65, you may face a penalty in the form of a permanent premium surcharge if your prescription-drug coverage on your 65th birthday and beyond isn't at least as rich as Medicare's. Minimum Creditable Coverage, or MCC, is the term used to define this minimum level of benefits.

How do you know whether your plan meets the MCC threshold? Your insurer tests all its prescription-drug riders annually, applying a formula provided by the Centers of Medicare and Medicaid Services, or CMS (the agency that governs Medicare) to a set of its own claims. It then informs your company (if you have employer-sponsored coverage) and you whether your plan meets the standard.

Nearly all plans that cover prescription drugs below the deductible meet the threshold. But HSA-qualified plans often run into trouble because non-preventive prescription drugs are applied to the medical deductible. Under this coverage, patients pay the full negotiated price of the prescription until the deductible is satisfied. At that point, insurers or employers can apply other cost-sharing (such as copays and coinsurance) or cover prescriptions in full.

If Your Plan Fails to Provide MCC

If your coverage doesn't meet the MCC threshold, you will pay a premium surcharge for every month beginning with your 65th birthday that you are enrolled in non-MCC coverage. This surcharge is applied to the monthly premium until you disenroll in coverage (usually at your death).

The penalty is equal to 1% of the national base beneficiary premium (the average Part D premium) for every month after you turn age 65 that you don't have MCC prescription-drug coverage. The national base beneficiary premium in 2023 is $32.74.

Example: You're enrolled in non-MCC coverage when you turn age 65 and remain covered on that plan until you retire on the month of your 68th birthday. Thus, you have a total of 36 months of non-MCC coverage. To calculate your permanent Part D premium surcharge, multiply 1% of the national base beneficiary premium (or $0.32) by 36 months for a total of $11.52. When you enroll in Part D coverage, you'll pay a monthly surcharge of $11.52 forever. If the standard premium for your plan is $35, for example, your premium is $46.53.

The national base beneficiary premium is different each year, so the penalty amount varies because it's always 1% of that variable figure. The national base beneficiary premium has remained about the same for the past three years, but it is subject to increases or decreases as the average Part D premium fluctuates.

How to Avoid the Surcharge

You have at least two options to avoid the surcharge:

Don't enroll in Part D. If you don't enroll in Part D coverage, you have no premium to which to apply the penalty. This option obviously isn't practical for most people.

Switch group coverage. You can anticipate this issue and change coverage before you turn age 65 to avoid the penalty or after age 65 to minimize the surcharge. For example, if your company offers multiple options and you know that one plan doesn't meet the MCC standard, enroll in another during open enrollment. Or switch to a spouse's employer's plan that meets the MCC threshold. You avoid the surcharge altogether if you switch to MCC before you turn age 65 and remain covered until you enroll in Part D. If you enroll in an MCC plan after age 65, you minimize the penalty.

Or your employer can help . . .

Employer Tools to Help Workers Avoid the Surcharge

Employers can choose one of two (or both) approaches to bring their medical plan up to the MCC threshold.

Post-Deductible HRA. Some employers offer HSA-qualified plans with very high deductibles, then add a Post-Deductible Health Reimbursement Arrangement. A Post-Deductible HRA doesn't begin to reimburse any non-preventive services until you've incurred responsibility for at least $1,500 (self-only coverage) or $3,000 (family plan).

Example: Rockland Forge sponsors an HSA-qualified plan with a $4,000 self-only deductible. It integrates an HRA that reimburses all deductible expenses after $1,750.

A Post-Deductible HRA reduces your financial responsibility because you're now covered by two plans and have an effective deductible equal to the lower of the two. In our example, you have, in effect, a $1,750 deductible.

But here's the catch: Your insurer will test its plan with a $4,000 deductible to determine whether it meets the MCC threshold. It almost surely won't. But a $1,750 deductible probably will. How to resolve this issue? Your employer must work with an independent actuary to test the medical plan with the HRA. The actuary can then certify that the plan meets the MCC standard. Your company's insurer may crunch the numbers, but it probably won't, especially if it doesn't administer the HRA.

Preventive Prescription-Drug Rider. Many insurers offer a prescription rider that covers preventive drugs below the deductible, often applying copays to these drugs. There is no standard list of preventive drugs, so insurers take different approaches to their list (from a narrow to an expansive list of qualifying drugs). If the list is expansive or the preventive drugs are available at no copay or small cost-sharing, the rider might meet the MCC standard - depending on the cost-sharing and the plan's deductible. Your insurer will make this calculation because it offers the rider.

The Effect of Health Savings Account Contributions on MCC Calculations

But, you ask, what if your company offers a very generous Health Savings Account contribution - say, it deposits $2,250 toward a $4,000 deductible. That contribution would leave you with the same $1,750 net deductible responsibility as in our Post-Deductible HRA example above.

Unfortunately, employer Health Savings Account contributions do not count in determining whether a drug plan meets the MCC threshold. Health Savings Account contributions aren't a medical plan, as an HRA is. Therefore, they don't apply - even if the company's contribution covers the full deductible!

The Dilemma (to be continued)

The MCC standard leaves in a quandary some working seniors (age 65 or older) who want to continue to fund a Health Savings Account but whose medical plan isn't MCC. Do they continue to fund their Health Savings Account and face the Part D penalty when they do enroll? Do they concede and switch to other coverage, thereby forfeiting their Health Savings Account eligibility and opportunity to make further contributions?

We'll tackle this topic in next week's edition of HSA Monday Mythbuster.

The Bottom Line

Understanding MCC is irrelevant to healthy employees who haven't reached their early 60s. Nothing that happens before your 65th birthday has any effect on whether they pay a permanent surcharge on their Part D premiums. But as you turn age 62, you need to pay attention.

At age 62, you can start to collect Social Security benefits, which disqualifies you from funding your Health Savings Account beginning at age 65 when you face mandatory enrollment in Medicare Part A.

At age 63 or 64, you need to think about your open-enrollment benefits choices and how your coverage beginning at age 65 will affect your eligibility to continue to fund your account.

If you don't understand the issue or pay attention to key ages, you may cede some control of your financial situation by losing your eligibility to continue to fund your Health Savings Account.

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The content of this column is informational only. They are 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.