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Employers, Unions Warn Against Taxing Medicare Drug Subsidy

By Stephen Miller  12/15/2009
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A provision in the Senate health care reform bill that would impose a new tax on employers providing Medicare-eligible retirees with prescription drug benefits has triggered a management/union alliance in opposition.

A letter to U.S. Senate Majority Leader Harry Reid urging the elimination of the proposed subsidy tax was sent jointly by the American Benefits Council, representing employers who sponsor benefit plans, and the AFL-CIO on Dec. 10. 2009. Unless dropped, the tax would become law under the Patient Protection and Affordable Care Act being debated by the Senate in December 2009.

The provision reverses a policy of the Medicare Modernization Act by taxing the 28 percent subsidy that employers receive for providing drug coverage for retirees. Congress enacted the policy in 2003 to provide an incentive for employers to maintain such coverage. Reversing that policy "undoubtedly will destabilize this vital coverage and impose more costs on the federal government," according to a statement by both organizations.

The American Benefits Council/AFL-CIO letter reads:

 “Accounting rules dictate that immediately upon being signed into law, this tax liability would have to be reflected on company financial statements. This would substantially increase liabilities for the very companies providing the most comprehensive coverage to current and future retirees. In the current economic environment, this would be particularly ill-advised and disruptive. Moreover, it would compel many employers to cease offering the coverage and require their retirees to obtain coverage through Medicare Part D, at considerably greater cost to the government. Independent calculations show that if as few as 24 percent of retirees are dropped from employer plans and obtain coverage through Medicare Part D, then [this] will be a net revenue losing provision.”

Separately, the Council released an analysis detailing how, in its view, the proposed tax would impact the financial statements of retiree health plan sponsors. 

Health Reform Bill Comparison
SHRM's Governmental Affairs Department created this side-by-side comparison of the House and Senate health care bills being debated in December 2009.

 Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Employers Would Reduce Health Benefits to Avoid Excise Tax, SHRM Online Benefits Discipline, December 2009

Employers Group Offers Mixed Appraisal of Senate Health Bill, SHRM Online Benefits Discipline, November 2009

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SHRM Online Benefits Discipline

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