Reform Taxing for Companies with Retiree Drug Benefits

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Healthcare reform will start off with a bang for those companies that still provide their retirees with prescription drug coverage. The legislation imposes a tax on the federal subsidy to employers providing such coverage, and accounting regulations will translate that tax into a charge to earnings.

The tax on the drug benefit subsidy “has nothing to do with health reform. It doesn’t help the uninsured get insurance, it doesn’t keep people in the game,” says Kenneth Porter, chief actuary and senior vice president at the American Benefits Council, which represents large companies on employee benefit issues.

“What it does do is cause an incredibly large accounting charge to be taken by corporations. Even though the tax is not imposed until 2011 or 2013, accounting rules require the charge be taken this quarter,” Porter says. “The only way a company can avoid taking that hit to earnings is to announce in the next few weeks that they will no longer provide prescription drug coverage to seniors.”

The charge to earnings will reflect the present value of future taxes on the subsidies a company will receive over the lifetime of its retirees. Towers Watson estimates a U.S. company providing drug coverage to 25,000 retirees and dependents would face a charge of $70 million this year.

Roland McDevitt, director of health care research at Towers Watson, notes that a lot of companies have already stopped providing retiree health benefits. “For those that are still in the game, this is a very strong incentive to move out,” McDevitt says. He points out that the legislation will also improve the quality of the drug plans available through Medicare, possibly eliminating one reason employers were still providing the benefit.

While the impact of healthcare reform will vary from company to company, Porter says, all employers that provide health benefits are likely to find it a challenge to have to comply with various components of the legislation before regulatory guidance is available.

“This is a massive piece of legislation that will require about a decade of regulation,” he says. “Companies are going to have implement portions where the effective date is prior to when regulations are available.” That can be awkward, Porter said, if government agencies end up interpreting the law differently than the company did.

This is the reason that Waxman backed down, this is also the reason that hundreds of thousands of retirees will lose their Rx coverage through their pension plans in the coming 2 years.

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http://www.treasuryandrisk.com/News/Pages/Hearing-on-Healthcare-Charges.aspx

Hearing Set on Healthcare Charges to Earnings Ending tax-free status of federal retiree drug subsidy key issue ShareThis From the 4/1/2010 Issue Print This Article | Order a Reprint

By Susan Kelly

The House Committee on Energy and Commerce scheduled a hearing later this month to discuss a number of large companies’ decision to take charges to earnings based on a provision in the healthcare reform measure.

AT&T, for example, said it would take a $1 billion charge in the current quarter. Deere announced a charge of $150 million, Caterpillar $100 million and 3M $90 million charge. The charges reflect a tax the new law imposes on a federal subsidy to companies that provide prescription drug coverage to their retirees.

Reps. Henry Waxman, D-Calif., chairman of the Energy and Commerce Committee, and Bart Stupak, D-Mich., issued letters summoning the CEOs of AT&T, Caterpillar, Deere and Verizon to an April 21 hearing to explain the earnings charges. (The Verizon letter cited an email the company sent to its employees.) The letters argue that the companies’ announcements of charges to earnings “appear to conflict with independent analyses” and cite a Congressional Budget Office report that estimated companies providing health insurance to more than 50 employees would see average premiums fall by as much as 3% by 2016.

In fact, though, the announcements cite just the section of the bill related to the new tax on the subsidy for retiree drug coverage. And James Klein, president of the American Benefits Council, predicts that there will be more companies announcing such charges. “Companies that sponsor retiree drug coverage are compelled now either to take an immediate hit on their financial status or determine they will not longer provide retiree drug coverage to avoid the accounting charge,” Klein says.

Joan Vines, a senior director in the compensation and benefits practice at accounting firm BDO, says the charges companies are reporting reflect Financial Accounting Standard 109, which governs income tax accruals.

In 2003, when Congress agreed to give a subsidy to companies that provided retiree drug coverage, the law said that it would be tax-free. So companies booked their liability to pay for the retirees’ drug benefits in the future, and they also booked the subsidy and the deferred tax benefit, Vines says. Under FAS 109, “I have to adjust the deferred tax assets to the right amount after this law change,” she says. “There’s not a transition to bring that in the financial statements. There’s a change, and without a transition to amortize it, it all comes into the quarter that the law changed.”

The American Benefits Council, which represents big employers on benefits issues, is arguing that Congress should go back and reverse the tax it imposed on the retiree drug subsidy, Klein says. He notes that the council commissioned a study that estimates the tax could result in 1.6 million to 2 million retirees losing their company-provided drug benefits or seeing those benefits change. Since the subsidy to employers is less than what it costs Medicare to provide such benefits, the extra federal spending to provide those benefits could erode or eliminate the revenue the government will take in from the tax, he says.

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