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.