This content is provided by the Americans for Tax Reform Foundation.

Current Law

Sponsors of retiree prescription drug plans (which are employer-provided plans similar to those offered by Medicare Part D) are eligible to recoup 28% of an eligible portion of their expenses from the Department of Health and Human Services. This is known as the Retiree Drug Subsidy (RDS).

Currently, companies may claim a business deduction for the full cost of providing retiree PDPs, even though they do not incur the full cost of the plans because of the subsidy they receive.

Scheduled Change

Beginning on Taxmageddon, companies must subtract the amount of money they receive in Retiree Drug Subsidies from the amount they claim as a business deduction.

ATRF Analysis

Disallowing the deduction of a company’s Retiree Drug Subsidy will increase that company’s income tax burden. In 2008, 3,500 companies sponsored retiree PDPs. Assuming this does not change through 2013, each sponsor faces an additional burden of almost $1.3 million in the tax’s first ten years. The total ten-year cost of the tax is $4.5 billion, according to the JCT’s static scoring.

Even though the tax has yet to kick in, it has already cost companies billions in accounting fees. AT&T paid $1 billion in the first quarter of 2010 to account for the law, which amounted to one third of its profits from the previous quarter. Other companies reported similar charges.

The RDS was first allowed as a business expense in 2003 to incentivize companies to continue offering retiree PDPs, rather than dumping their retirees onto the Medicare Part D rolls. Companies will have much less incentive to maintain retiree PDPs absent the extra 28% in business deductions, and some — such as Verizon, which stated in a release that the tax would have “significant implications for both retirees and employers” — may have to eliminate their retiree PDPs to avoid the onerous costs of the tax.

If the tax causes sponsors to drop their PDPs, thousands of retirees would flood into the Medicare Part D program. This wave would cost the federal government dearly — $544 per retiree, according to the Employment Benefit Research Institute —, swamping whatever revenue the tax would raise.

More importantly, loss of their employers’ PDPs will ultimately harm retirees, who on average receive more generous coverage under their current arrangement than they would on a Medicare Part D plan. The American Benefits Council speculates that switching plans could cost many retirees thousands of dollars per year in new out-of-pocket expenses.

This new Obamacare tax is bad for retirees, business, and government. It needs to go.

Ten-Year Cost to Taxpayers

Joint Committee on Taxation: $4.5 billion

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