Reform Risk: Retiree Drug Coverage

As House and Senate leaders struggle to find common ground on healthcare reform legislation, employer groups are working to ensure that retiree drug subsidies and federal safeguards under the Employee Retirement Income Security Act (ERISA) do not get lost in the shuffle.

While a conference committee usually reconciles differences in bills, the Congress is expected this time to act informally to forge a compromise health reform bill. As recently as Jan. 5, House Speaker Nancy Pelosi (D-Calif.) said lawmakers were "very close" to resolving differences between the two measures and sending a final version to President Barack Obama.

The American Benefits Council has teamed with the AFL-CIO to fight a key proposal in both the House and Senate bills that would repeal the business tax deduction for federal subsidies on most retiree prescription drug plans.

For the last several years, employers with retiree health plans that provide prescription drug coverage have enjoyed a subsidy--which can be excluded from the employer's income--equal to 28% of the allowable costs. "This [subsidy] now would be taxed," explains Jim Klein, president of the American Benefits Council in Washington.

"That total future tax liability would have to be immediately reflected on financial statements the minute health reform is signed into law," Klein says. "These are employers who are trying to do the right thing, but the financial statement impact could compel many of these companies to drop their coverage entirely."

He predicts that many more retirees would seek prescription coverage through the Medicare Part D program, resulting in higher government spending. "If as few as 24% of retirees with drug coverage are moved from their employer plan into Medicare, this tax will be a revenue loser for the government," Klein says.

Meanwhile, the ERISA Industry Committee (ERIC)--another employer group in Washington that focuses on plans sponsored by large employers--worries about how ERISA's preemption of state laws will fare in deliberations over what role the states will have in regulating healthcare plans.

"It is essential that new legislation not give states jurisdiction over large companies with self-insured plans," says Gretchen Young, ERIC's vice president of health policy. "If the basic [ERISA] preemption is no longer protected, preventing larger employers from having to follow 50 different state rules, employers would have to re-evaluate whether they could offer health insurance to their employees."

Of course, there may now be penalties for failing to provide health insurance to active workers. Klein observes that the House bill would impose "pay or play" penalties, equal to 8% of payroll, on employers that did not provide health coverage.

He says the Senate approach is more complicated, but not as severe. "In essence, if an employer does not offer a plan at all and if at least one employee gets a federal subsidy [due to income] to obtain coverage in the insurance exchange, then the employer pays a penalty equal to $750 times the number of full-time employees," Klein says.

A new "priority issues" document on the House and Senate health reform measures, released by the American Benefits Council on Jan. 5, is available at:

For more information about employers' views of the healthcare reform measures, see Cutting Health Benefits to Avoid An Excise Tax.


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