Employers that currently receive a federal subsidy for providing retiree prescription drug coverage will no longer be able to take a deduction for those retiree drug expenses with respect to that subsidy as of 2013 under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010.
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Interim final rules on grandfathered health plans recently issued by the U.S. Departments of the Treasury, Labor, and Health and Human Services clarifies the departments’ position with respect to the application of certain group health plan mandates to very small health plans, including retiree-only plans.
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Health Reform Provisions
Employers providing health coverage to early retirees should be aware of the new retiree reinsurance program under health care reform that goes into effect June 1, 2010. Recent guidance issued by the U.S. Department of Health and Human Services specifies the qualifications for eligibility, the steps plan sponsors must take in the application process and the requirements for reimbursement. The program is scheduled to begin on June 1, 2010, and will end on January 1, 2014, or until the $5 billion in funding allocated to the program is exhausted.
Eligibility to participate in the program is not automatic. A plan sponsor is eligible to participate in the program if the plan sponsor submits a timely application for certification to the secretary, or the secretary’s designee, containing the necessary information. Applications will be processed in the order received. Incomplete applications will be returned, and any revised applications will be processed based on the date the revised submission is received, not based on the date of the original, returned submission. Due to the limited duration and budget for this program, it is important for plan sponsors interested in the program to become certified as quickly as possible.
Your Next Moves
Employers providing health coverage to early retirees should analyze their current benefit plan design and cost structure to determine whether they will apply to the program.
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The Facts
Both the recently passed Senate and House health care reform bills contain provisions that affect retiree health benefits. Both bills remove the tax exemption for Medicare Part D subsidies received by employers who provide retiree prescription drug coverage. In addition, the House bill prohibits employers from changing a retiree’s available benefits once the individual has retired, and the Senate bill contains a 40 percent excise tax on retiree health benefits that exceed certain thresholds ($9,850 for single coverage and $26,000 for family coverage). Both bills decrease the Medicare prescription drug coverage gap by $500 (with the House bill completely eliminating the gap by 2019) and provide a 50 percent discount on brand-name drugs to retirees affected by the coverage gap.
What’s at Stake
These provisions have the potential to decrease employer-provided retiree health and prescription drug benefits. Employers will find it much more expensive to provide these benefits without the tax exemption for the prescription drug coverage subsidy and with the threat of a 40 percent excise tax on health coverage beyond the stated threshold. This extra cost may serve as a deterrent to providing such benefits. In addition, the inability to alter the benefits offered to retirees provides an incentive to decrease or eliminate retiree benefits so employers are not obligated to provide such coverage indefinitely. Further, the reduction in the Medicare coverage gap and discount on drugs will influence employers to eliminate prescription drug coverage because these increases bring the Medicare drug benefit to a level closer to that of employer-provided coverage.
Steps to Consider
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