Mandated by the Patient Protection & Affordable Care Act (PPACA)
As of January 1, 2013 an important change to Medicare and Medicaid, mandated by the Patient Protection and Affordable Care Act (PPACA), is to the Employer Retiree Coverage Subsidy. For any specific legal or financial advice, it is recommended that you consult with a licensed professional in your state.
Employer Retiree Coverage Subsidy
Employers will still receive the tax-free subsidy, but employers will no longer be able to deduct the cost of prescription drugs to the extent reimbursed by the federal subsidy on their federal tax returns.
Employer Retiree Coverage Subsidy Changing
Prior to January 1, 2013 employers were eligible for a tax-free subsidy of 28% of the costs they incurred to provide a prescription drug benefit program to their retirees. This subsidy was authorized by the Medicare Modernization Act of 2003. Employers were also able to deduct any outlays made with these subsidies to provide retiree drug coverage for income tax purposes.
As of January 1, 2013 employers may still receive the subsidy, but will not be able to deduct the cost of the prescription drugs to the extent reimbursed by the subsidy on federal tax returns.
Coverages that the Changes Apply To
Prescription drug coverage that is actuarially equivalent to the coverage offered under Medicare Part D is eligible for the federal subsidy.
Coverage is Not Included as Taxable Income
However, this change will eliminate the tax deduction to the extent of the subsidy received.
Impact on Businesses
Although the change just recently went into effect, a Towers Watson study estimated the total cost for U.S. corporate financial statements would be $14 billion if companies did not shift their retirees out of drug subsidy plans. An American Benefits Council study estimated that between 1.5 and 2 million retirees would have their drug coverage terminated because employers would be forced to shift them into Medicare Part D coverage. The exact impact on businesses remains to be seen.
Reeva Simon Rivkin, RHU, HIP, President, Rivkin Insurance Services; CA LicOB12353
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* The views expressed do not necessarily reflect the official policy, position, or opinions of Rivkin Insurance Services. This update is provided for informational purposes. Consult with a licensed accountant or attorney regarding any legal / tax matters discussed herein.