diff --git a/vscode/src/client.ts b/vscode/src/client.ts
index 594ce633c..114b385f2 100644
--- a/vscode/src/client.ts
+++ b/vscode/src/client.ts
@@ -389,6 +389,10 @@ export default class Client extends LanguageClient implements ClientInterface {
       this.degraded = this.initializeResult?.degraded_mode;
     }
 
+    if (this.initializeResult?.bundle_env) {
+      this.ruby.mergeComposedEnvironment(this.initializeResult.bundle_env);
+    }
+
     await this.fetchAddons();
   }
 
diff --git a/vscode/src/debugger.ts b/vscode/src/debugger.ts
index 12e7547dc..4b39681cf 100644
--- a/vscode/src/debugger.ts
+++ b/vscode/src/debugger.ts
@@ -127,6 +127,12 @@ export class Debugger
       name: workspace.workspaceFolder.name,
     };
 
+    // In newer versions of the server, the composed bundle environment is merged directly into the Ruby object and no
+    // adjustments have to be made here
+    if (debugConfiguration.env.BUNDLE_GEMFILE) {
+      return debugConfiguration;
+    }
+
     const customBundleUri = vscode.Uri.joinPath(workspaceUri, ".ruby-lsp");
 
     return vscode.workspace.fs.readDirectory(customBundleUri).then(
diff --git a/vscode/src/ruby.ts b/vscode/src/ruby.ts
index fad69bb63..bf0d6c8e7 100644
--- a/vscode/src/ruby.ts
+++ b/vscode/src/ruby.ts
@@ -218,6 +218,10 @@ export class Ruby implements RubyInterface {
     return this.activateRuby();
   }
 
+  mergeComposedEnvironment(env: Record<string, string>) {
+    this._env = { ...this._env, ...env };
+  }
+
   private async runActivation(manager: VersionManager) {
     const { env, version, yjit, gemPath } = await manager.activate();
     const [major, minor, _patch] = version.split(".").map(Number);
diff --git a/vscode/src/test/suite/ruby.test.ts b/vscode/src/test/suite/ruby.test.ts
index b3832b439..e1c4abb34 100644
--- a/vscode/src/test/suite/ruby.test.ts
+++ b/vscode/src/test/suite/ruby.test.ts
@@ -150,4 +150,21 @@ suite("Ruby environment activation", () => {
       "/opt/rubies/3.3.5/lib/ruby/gems/3.3.0",
     ]);
   });
+
+  test("mergeComposedEnv merges environment variables", () => {
+    const ruby = new Ruby(
+      context,
+      workspaceFolder,
+      outputChannel,
+      FAKE_TELEMETRY,
+    );
+
+    assert.deepStrictEqual(ruby.env, {});
+
+    ruby.mergeComposedEnvironment({
+      BUNDLE_GEMFILE: ".ruby-lsp/Gemfile",
+    });
+
+    assert.deepStrictEqual(ruby.env, { BUNDLE_GEMFILE: ".ruby-lsp/Gemfile" });
+  });
 });