One company alone, AT&T, says it will take a non-cash
charge of $1 billion to account for the change in how retiree drug
benefits are taxed. Ultimately companies may think twice about
continuing prescription drug benefits for retired workers, leaving
many to wonder if their benefits are safe.
The answer for many
will be "no."
Millions of retirees receiving prescription drug insurance from a
former employer could see their coverage dropped or changed as
companies consider how to offset the new taxes.
The health care overhaul takes back a lucrative tax break first
offered in 2003 to entice companies to continue offering drug
benefits. Companies were allowed to write off a tax-free government
subsidy of 28 cents for every dollar spent on their programs. Today,
hundreds of companies take a tax deduction for the cost of their
prescription drug benefits for retirees. The subsidized benefits
kept many from having to rely on Medicare.
Under the new health care law, companies will continue to receive
a 28 percent tax-free subsidy, but they no longer get the double
benefit of deducting the value of the subsidy. The government
estimates this change will generate about $4.5 billion over the next
decade to help pay for the health care overhaul.
Some business consultants studying the tax changes say as many as
2 million retirees could lose their prescription drug coverage if
companies decide to offset the tax by cutting their drug benefits.
This would lead to a rise in Medicare enrollment, said James Klein,
president of the American Benefits Council, an advocate for
corporations offering employee benefits.
"So much for the premise that if you like the coverage you have,
you can keep it," Klein said.
The alternative to private insurance is Medicare Part D, the
government's prescription drug program.
One key drawback is what's known as the doughnut hole. This is a
gap in prescription drug coverage that forces many retirees to pay
for some of their prescription drugs out of their own pockets.
It's a well-known problem that was addressed in the reform
legislation by providing a $250 rebate for seniors this year and a
50 percent discount on brand-name drugs next year. By 2020 the
Medicare drug gap will be completely closed.
However this positive news also means that many companies may
drop their coverage when the new tax kicks in, knowing the Medicare
gap will be fixed in the future and believing retirees won't be
worse off, said Dave Osterndorf, chief actuary for human resources
consultant Towers Watson.
If companies decide to make changes, it's not likely to be soon,
since the new tax doesn't start until 2013.
"I don't think employers are going to get rid of their retiree
medical plans right now," said Ken Sperling, health care practice
leader for Hewitt Associates, a human resources consultant. "They'll
take the financial hit this quarter because they have to, then
they'll plan on what they're going to do once that subsidy becomes
Accounting rules require companies to record the new tax
liability in the quarter in which a new law imposes the tax.
Although it will reduce first-quarter profits, it does not affect
the company's long-term financial health.
In addition to AT&T's first-quarter $1 billion non-cash charge,
Deere & Co. said it would incur a $150 million charge and
Caterpillar Inc., $100 million.
Wall Street analysts caution investors against making too much of
the hefty charges.
"Don't overreact to the hit to earnings," said David Zion,
research analyst for Credit Suisse in a March 24 note.
Zion analyzed the regulatory filings of S&P 500 companies, and of
those who receive the drug program subsidy, he said six companies
may have to pay an average of more than $10 million a year between
2013 and 2019.
AT&T takes the biggest hit of about $62 million a year. Consider,
however, that AT&T posts an annual profit exceeding $12 billion.
Verizon Communications Inc.'s cost is about $56 million a year. It
earned $12.5 billion in 2008 and more than $10 billion last year.
Others that would pay more than $10 million a year are Alcoa
Inc., Exxon Mobil Corp., Lockheed Martin and Qwest Communications.
Another 14 companies would pay more than $5 million a year,
according to Zion's estimates.