What You Need to Know About Medicare Part D Changes
When approaching retirement, Medicare becomes a central component of your healthcare planning. While many retirees and near-retirees are aware of Medicare Parts A and B, Medicare Part D often causes confusion. With significant 2025 Medicare changes to Part D drug coverage now in effect, it’s more important than ever to understand the rules, penalties, and opportunities.
In this blog, we break down the critical elements you need to know about Medicare Part D Changes, how they affect your employer health coverage, and how to avoid costly penalties. We’ll also explore key planning decisions, including the contribution to an HSA and IRS rules, and how all of this can fit into your broader Medicare retirement planning.
What Is Medicare Part D?
Medicare Part D is the portion of Medicare that provides prescription drug coverage. It helps cover the cost of medications prescribed by your doctor, which are filled at a retail or mail-order pharmacy.
Think of Part D as your drug card—it’s vital to anyone on Medicare who takes prescription medications, especially as drug costs rise. It’s also subject to special rules and timelines for enrollment and missing those can result in Medicare penalties.
2025 Medicare Part D Changes
The Inflation Reduction Act Medicare provisions have begun to take effect since 2023. One of the most impactful changes to Medicare Part D to date has occurred in January 2025:
- The maximum annual out-of-pocket cost for prescription drugs under Medicare Part D has been reduced from $8,000 to $2,000.
This is a game changer for retirees who rely on high-cost medications. It significantly lowers the burden of drug expenses and provides more predictable budgeting in retirement.
However, this change also alters the standard against which employer plans are measured—particularly in terms of what is called creditable prescription drug coverage.
What Is Creditable Drug Coverage?
The term “creditable drug coverage“ refers to whether your employer-sponsored drug plan pays at least as much if not more than Medicare’s standard Part D coverage. Historically, most employer plans met or exceeded this standard. But with Medicare’s changes to Part D plans in 2025, some employer plans no longer meet this benchmark.
If your employer-based prescription drug plan is not considered creditable, you could be exposed to the Medicare late enrollment penalty for Part D unless you act quickly.
Why Employer Coverage Might No Longer Be Enough
If you’re still working past age 65 and have employer coverage, you may have thought it made sense to delay enrolling in Medicare. In the past, this was often the best decision. But the 2025 changes have flipped the equation in some cases.
A key issue is whether your employer’s plan still provides creditable drug coverage in consideration of the new, Medicare Part D standards. If it does not, and you don’t enroll in a Medicare Part D plan within a set timeframe, you could face lifetime penalties.
How to Know if Your Plan Is Creditable
Fortunately, you don’t have to guess. By law, your employer is required to notify you each year—usually around October 15—whether your coverage is creditable for Medicare.
You may see this in letters or emails titled:
- “Medicare Drug Coverage Letter”
- “Part D Notice of Creditable Coverage”
- “Medicare Creditable Coverage Notice”
If your plan is not creditable, you’ll need to enroll in a Part D plan within a 60-day Special Enrollment Period (SEP) of your employer plan’s end date to avoid penalties.
Understanding the Medicare Late Enrollment Penalty
The Medicare Part D late enrollment penalty is 1% per month for every month you go without creditable drug coverage when you should have been enrolled.
That penalty is based on the National Base Beneficiary Premium ($36.78 in 2025), and the amount is added to your Medicare Part D premium monthly for life.
Example:
- You go 12 months without creditable coverage.
- 1% × 12 months = 12%
- 12% of $36.78 = $4.41
- You pay $4.41/month for life on top of your regular Part D premium.
- NOTE: The National Base Beneficiary Premium increases every year. Therefore, your Part D penalty will also increase correspondingly.
This is why it’s critical to understand the credibility status of your employer prescription drug coverage and to act quickly if your plan is no longer creditable for Medicare.
To learn more about avoiding retirement missteps, read the article “How to Retire at 62 – All The Numbers You Need To Know“.
What About Special Enrollment Periods?
If you receive a notice that your employer plan is no longer creditable, Medicare provides a 60-day Special Enrollment Period (SEP). This SEP allows you to enroll in a Part D plan without penalty—as long as you do so within that time frame.
This SEP is especially important if the notice comes mid-year, outside of Medicare’s Annual Enrollment Period (AEP) (October 15 – December 7).
HSA and Medicare Rules: A Critical Planning Element
Health Savings Accounts (HSAs) are a popular tax-advantaged tool for managing healthcare expenses and retirement planning. However, HSA and IRS rules don’t always play nicely together regarding Medicare.
If you’re still working and contributing to an HSA, enrolling in Medicare—even Part A—makes you ineligible to contribute further to your HSA.
This creates a unique dilemma for those facing a non-creditable prescription drug coverage notice from their employer. You may be:
- Trying to avoid a Part D penalty by enrolling in Medicare
- Trying to keep HSA contributions going for another year or two
The conflict? You can’t do both.
Once you enroll in Medicare Part A, the IRS prohibits you from making new HSA contributions.
Case-by-Case Evaluation
For some, it may be worth receiving and paying a lifetime Part D penalty in order to continue maximizing HSA contributions (especially with catch-up amounts).
- 2025 HSA contribution limits for families: $8,550
- Catch-up contribution (age 55+): $1,000
- Total potential: $9,550 per year
Over two years, that’s $19,100 in tax-deferred savings. Even with a lifetime Medicare Part D penalty of $4.41 per month for 25 years, which is $1,323, the HSA “excess contributions” could outweigh the penalty costs for both Part D and the penalties assessed by the IRS.
NOTE: The IRS will impose a 6% excise tax yearly on any “excess HSA contributions” that remain in the HSA account.
This decision should always be made in consultation with both a Medicare specialist and your tax advisor/financial advisor.
To learn more about smart retirement tax strategies, read the article “How to Make the Most of Tax-Efficient Retirement Strategies”.
The Takeaway: What Should You Do?
If you’re turning 65 or are over 65 and still working, you need to:
- Watch for your Creditable Coverage Notice.
- If your prescription drug plan is NOT creditable for Medicare, act fast.
- Mark the 60-Day Special Enrollment Period (SEP).
- You must enroll in a Part D plan within 60 days of your non-creditable plan ending to avoid the lifetime penalty.
- Review your HSA situation.
- Consider how Medicare enrollment affects HSA contributions.
- Use your Special Enrollment Period [SEP] if needed.
- Especially if employer plans change mid-year.
- Get professional guidance.
- This is a highly individualized decision. Speak with a Medicare expert like Shawn Southard and your financial advisor.
If you want to understand all this a little better, we offer a complimentary phone call that you can schedule with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need.