The American Benefits Council is urging the repeal of a health care reform provision that reduces the tax deductions for companies with retiree drug coverage. Large companies have announced they expect to take an immediate substantial hit to account for smaller tax deductions in the future.

The hit on earnings will prompt employers to drop their retiree drug coverage, according to the American Benefits Council, and move retired employees into the Medicare Part D program.

The council claims the provision will also discourage new hires - another major hit to a nation reeling from millions of job losses.

"For months, the American Benefits Council, along with several employers and labor unions, warned that the retiree drug subsidy tax in the health care legislation would impose an enormous hit on company financial statements as soon as the bill was signed into law," Council President James A. Klein said in a statement.

The recent announcements by major U.S. companies have captured Wall Street's attention, while the Obama Administration fails to acknowledge their significance. Since the president has made clear that job creation is his top priority, we urge the Administration and Congress to remove this obstacle to economic recovery."

According to the New York Times, AT&T announced last week that it was taking a $1 billion charge because of the provision. Deere & Company announced a $150 million charge, Caterpillar a $100 million charge, and 3M a $90 million charge.

"Many companies said they were taking these charges now, before the current quarter ended, to comply with accounting rules. But some corporate critics asserted that the companies' rapid response to the health legislation was aimed at pressing the administration to repeal the provision," writes Times staff writer Steven Greenhouse.

U.S. Commerce Secretary Gary Locke says the actions of these companies are "premature and irresponsible" in advance of government regulations, but Klein asserts this statement is simply incorrect.

"Accounting rules require these companies to reflect the hit on their financial statements before they announce first-quarter earnings," Klein said. "No regulations will or could be issued to change that. Only a complete reversal of the provision will negate these losses."

As many as 2 million could lose the prescription drug coverage provided by their former employers, leaving them to enroll in Medicare's program, reports The Associated Press.

White House spokesman Robert Gibbs has defended the provision, saying the original provision that allowed companies to deduct the federal subsidies from their taxable income was a "loophole" that will be closed.

But, according to the council, this provision of the Medicare Modernization Act was "carefully crafted on bipartisan basis to save the government money by making it possible for employers to continue sponsoring retiree drug coverage, rather than move retirees into the Medicare Part D program."

"Over the next several days, many companies will be compelled to either take a hit on their earnings or decide to move retirees into the Medicare Part D program." Klein said. "As our recent research report clearly shows, as more retirees are moved from employer plans to Medicare Part D, government outlays will increase, and the shift from employer retiree drug subsidy programs to Medicare Part D is likely to be significant.

In the end, this so-called revenue raising provision may actually cost the government money. A separate study, conducted by the Towers Watson consulting, reported that unless companies change their benefit plans, the aggregate accounting charge would be nearly $14 billion.

We understand the Obama Administration doesn't want a shadow cast over its historic legislative achievement, but the fact of the matter is, one-and-a-half to two million retirees will not be able to keep the coverage they like. We urge the White House and Congress to reverse this provision of the law at the first opportunity."

Instant Insights /

Benefits council urges repeal of health care overhaul provision

More From HR Executive

Related Stories

Recommended For You