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Guest Article

Deloitte logo

(From the January 26, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Ways and Means Committee Chairman Clarifies Congressional Intent on Medicare Subsidy


Employers that shift too much of the cost of their retiree prescription drug benefit to retirees will not be eligible for the 28 percent subsidy enacted as part of the Medicare Prescription Drug, Improvement and Modernization Act (P.L. 108-173), according to House Ways and Means Committee Chairman Bill Thomas (R-CA). Thomas, a principal drafter of the Act, expressed his views in a letter to Secretary Tommy Thompson of the Department of Health and Human Services, which has regulatory authority over the subsidy.

A recent Wall Street Journal article ("U.S. Drug Subsidy Benefits Employers," January 8, 2004, page A3) prompted Chairman Thomas's letter. The article suggested that, due to "a little-noticed provision in the new law," employers can "use the subsidy to erase the entire cost of prescription drugs for retirees, or even turn a profit from a drug plan." But the article fails to mention other provisions in the new law that will make this almost impossible.

Background

At issue is new section 1860D-22 of the Social Security Act, which generally authorizes a 28 percent direct subsidy to employers that provide prescription drug coverage to Medicare-eligible retirees. The subsidy will be available only with respect to Medicare-eligible retirees that opt for the employer's prescription drug plan instead of Medicare Part D-- the new Medicare prescription drug benefit -- and only if the employer's plan is "actuarially equivalent" to Part D. Furthermore, it will apply only to the "retiree's gross covered retiree plan-related prescription drug costs" of between $250 and $5,000 (indexed), for a maximum per retiree annual subsidy of $1,330. Pursuant to new IRC section 1202, the subsidy is not taxable income to the employer.

The "little-noticed provision" referred to in the Wall Street Journal article is section 1860D- 22(a)(3)(C), which defines "gross covered retiree plan-related prescription drug costs" to specifically include costs paid by the employer and by the retiree. Thus, the article correctly notes, "if an employer and a retiree each pay $1,000 toward the retiree's medical costs, the employer's subsidy is calculated on the full $2,000, bringing the company a total subsidy of $490, rather than the $210 that it would get if it received a subsidy only on its share." The article goes on to attempt to illustrate how an employer might use this "quirk in the legislation" to offset most, if not all, of its cost of providing prescription drug benefits to Medicare-eligible retirees.

But what the article does not consider or discuss is the fact that the subsidy is available only if the employer's prescription drug plan is actuarially equivalent to the Medicare Part D benefit.

As the Thomas letter points out, "an employer who chooses to reduce prescription drug coverage below Medicare's standard benefit would not qualify for the new subsidy." And even employers that manage to shift substantial portions of the plan's costs to retirees and still satisfy the actuarial equivalence standard may have problems keeping retirees from choosing the Part D benefit, another prerequisite for the subsidy.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094).

Copyright 2003, Deloitte.


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