By: HUB's EB Compliance Team
Employees who work past age 65 and delay Medicare enrollment because they have employer-sponsored prescription drug coverage are making a bet: that their coverage qualifies as “creditable” under Medicare Part D rules. When it doesn't, or stops being creditable, the consequence is not a one-time inconvenience. It is a permanent, lifetime premium surcharge that follows the individual for as long as they carry Medicare prescription drug coverage.
This risk is becoming more pronounced for the 2027 plan year, as changes to the federal simplified determination method mean more employer plans will fail to qualify as creditable than in prior years. Plan sponsors play a central role in helping employees understand what is at stake and avoid triggering this penalty unknowingly.
Why More Plans Will Be Non-Creditable for 2027
Prescription drug coverage is “creditable” if it is expected to pay, on average, at least as much as the standard Medicare Part D benefit. Employers may determine creditable status using an actuarial determination or the Centers for Medicare and Medicaid Services' (CMS) simplified method. CMS revised the simplified method for plan years beginning in 2027, raising the required average payment threshold for prescription drug expenses from 60% to 73% of costs, while also requiring reasonable coverage of biological products. Plan designs that comfortably cleared the 60% threshold for years may fall short of 73% without changes.
As discussed in HUB's prior article on this topic, this shift means a meaningful number of employer plan options that were creditable for 2026 and before will not automatically remain so for 2027. Employers should not assume that a plan design carried over from prior years will retain creditable status; this determination must be reevaluated under the revised method for each plan year going forward.
What Happens When an Employee Doesn't Have Creditable Coverage
Individuals become eligible for Medicare Part D during their Initial Enrollment Period (IEP), a seven-month window beginning three months before the month they turn 65 and ending three months after. An individual who has creditable coverage, most often through an employer-sponsored plan, may decline Part D enrollment during the IEP without penalty and enroll later.
Once that creditable coverage ends, whether due to retirement, a job change, or the plan itself losing creditable status, the individual generally has a two-month Special Enrollment Period (SEP) to enroll in a Part D plan or Medicare Advantage plan with drug coverage. If the individual does not enroll within that SEP and the gap without creditable coverage reaches 63 or more consecutive days, a late enrollment penalty applies once the individual eventually enrolls in Part D. Individuals without a SEP and who have not enrolled during their IEP must wait until the annual election period to enroll.
This is the core risk of the 2027 changes: an employee who reasonably believed their employer plan was creditable in 2026 may find that the same plan, unchanged, no longer meets the revised threshold for 2027. If the employee does not enroll in Part D during the applicable enrollment window once notified of the change, a coverage gap and associated penalty can result.
How the Late Enrollment Penalty Is Calculated
The Part D late enrollment penalty is calculated as 1% of the national base beneficiary premium for each full month the individual went without creditable prescription drug coverage after their IEP ended, rounded to the nearest $0.10. This amount is added to the individual's monthly Part D premium and, in most cases, continues for as long as the individual maintains Medicare prescription drug coverage, even if they switch plans.
The national base beneficiary premium is recalculated annually. CMS has set this figure at $38.99 for 2026, and, in bid information released in July 2026, at $41.33 for 2027, an increase capped at 6% annually under the Inflation Reduction Act's premium stabilization provision through 2029. Because the penalty is recalculated each year using the then-current premium, the dollar amount of an individual's penalty can change annually even though the percentage penalty itself remains fixed.
Penalty Calculation Example
Consider an employee who turns 65 in January 2026 and is covered under an employer plan that was creditable for the 2026 plan year. The employer's plan is redesigned for 2027 but does not meet the revised 73% simplified method threshold, and CMS's required disclosure notice informs the employee the plan is non-creditable starting January 1, 2027. The employee does not enroll in a standalone Part D plan and goes without creditable drug coverage for 20 months before enrolling in Part D.
Using the 2027 base beneficiary premium of $41.33, the calculation is:
1% × $41.33 × 20 months = $8.266, rounded to $8.30
This $8.30 penalty would be added to the employee's monthly Part D premium and, absent a successful appeal showing prior creditable coverage, would continue for as long as they maintain Medicare drug coverage. Because the national base beneficiary premium changes annually, the exact dollar penalty is recalculated each year, but the underlying 20% penalty rate is fixed for the life of the individual's Part D enrollment.
Employee Options
Employees have three options to avoid late enrollment penalties when their employers offer non-creditable coverage.
Option 1: Consider other plan options offered by their employer or their spouse’s employer that are creditable (if available). Electing coverage under a creditable plan will allow them to avoid late enrollment penalties.
Option 2: Elect coverage under the non-creditable plan, while also electing coverage under a Part D Plan. This allows the employee to maintain the current plan election while also maintaining creditable coverage to avoid late enrollment penalties. Under the Medicare Secondary Payer Rules, the Part D Coverage will be the secondary payer in most instances.
Option 3: Waive employer sponsored coverage entirely in favor of Medicare.
Action Items for Plan Sponsors
- Confirm creditable status under the revised method. Employers should determine, plan by plan, whether 2027 plan designs meet the revised simplified method threshold (or have an actuarial determination made) before relying on prior-year determinations.
- Issue creditable coverage notices by October 15, 2026. Part D-eligible individuals must receive notice of each plan option's creditable status before the Medicare Annual Enrollment Period begins, and again at other specified times, such as prior to an individual's IEP.
- Flag status changes clearly. Where a plan that was creditable for 2026 becomes non-creditable for 2027, employers should consider highlighting this change in employee communications rather than relying on the standard notice alone.
- Point employees toward qualified resources to advise on Medicare. Medicare is complex and Medicare eligible employees are likely to have questions. Since Medicare is not the employer’s own health plan, they are best directed to resources such as https://www.cms.gov to provide them with information about Medicare.
Conclusion
The 2027 changes to the Part D simplified method raise the stakes for employees who have relied on employer-sponsored coverage to avoid Medicare's late enrollment penalty. A plan design that remained creditable for years may no longer qualify, and employees who are not clearly notified of that change risk a permanent premium surcharge. Plan sponsors who confirm creditable status early, issue clear and timely notices, and help employees understand their enrollment windows will reduce the likelihood that their workforce is caught unaware.
If you have any questions, please contact your HUB advisor. View more compliance articles in our Compliance Directory.
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Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization's or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect, and Hub International does not have an obligation to update this information. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization's specific situation in light of your or your organization's particular needs.