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Part D Retiree Drug Subsidy Tax Likely To Cost Government, Employers Say

Executive Summary

Business leaders are intensifying opposition to a provision in the House and Senate health care reform bills that would revise the tax treatment on the Medicare Part D subsidy for employers who provide retirees with prescription drug coverage

Business leaders are intensifying opposition to a provision in the House and Senate health care reform bills that would revise the tax treatment on the Medicare Part D subsidy for employers who provide retirees with prescription drug coverage.

The House and Senate bills would eliminate employers' ability to deduct an amount equal to the federal subsidy they receive, increasing employers' tax liability. CBO estimates the change will generate $5.4 billion over 10 years to help fund health reform. The legislation is moving to a Senate-House conference following passage of individual bills in the Senate Dec. 24 and in the House in November.

One recent letter to Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., was signed by the chief financial officers of large companies including Boeing, Caterpillar, Deere, MetLife and Xerox.

"Taxing the subsidy means that more companies will eliminate or reduce the coverage, and more retirees will shift to Medicare Part D, which will create more cost for both the government and the retirees," the Dec. 11 letter states.

Reductions In Earnings Statements Expected

Further, the change "will result in large earnings statement reductions due to U.S. GAAP income tax accounting rules, which would require employers to immediately account for the present value of this tax increase," the letter points out.

The impact "would be felt throughout the overall U.S. economy as corporate entities and investors would be forced to react."

A Dec. 15 letter to Senate leaders from the American Benefits Council also maintains the new tax treatment for the subsidy would present serious financial liabilities. ABC represents primarily large employers and other organizations providing health and retirement plans.

"The Senate was not aware of these accounting implications when this provision was included in the legislation," ABC states.

"It is inconceivable that in the current economic climate, the Congress and President Obama would consider a provision that will upset financial markets, make it more difficult for companies to borrow funds, force millions of retirees out of their employer-sponsored coverage and unquestionably result in a net loss to the government."

Depending on the size of a company's retiree population, the drug subsidy tax could decrease net earnings by 14 to 83 percent, ABC estimates. The group also maintains the tax proposal will be a net revenue loser if as few as 24 percent of retirees are dropped from employer plans and moved to Part D.

Under the Medicare Modernization Act of 2003, employers receive a 28 percent tax-free subsidy toward the cost of drug coverage for retirees as long as the benefit is actuarially equivalent to Part D.

The subsidy is aimed at ensuring employers maintain drug coverage for retirees. MMA also allows employers to deduct the amount of benefits paid. According to the Centers for Medicare and Medicaid Services, approximately 7 million retirees access drug coverage through employers receiving the subsidy.

Under the Senate bill, the change in deductibility would become effective in 2011, and the House would implement the new tax treatment in 2013.

Former CMS Head Lobbies Against Tax Change

Opponents of the provisions have enlisted former CMS Administrator Tom Scully to lobby against the change. Scully was at CMS when MMA was being developed.

In an editorial published Dec. 3 in The Wall Street Journal, Scully writes: "The careful calculation that was made in 2003 to minimize federal spending and maximize private coverage will go out the window if this provision becomes law. Any short-term cost savings that Congress gets by changing the tax provision will be overwhelmed by higher costs in the long run."

- Cathy Kelly ( 1 [email protected] )

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