From the April 2010 issue of Treasury & Risk magazine

Reform Taxing for Companies with Retiree Drug Benefits

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.

See also Hearing Set on Healthcare Charges to Earnings.

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