Feds Kick in $5B for Early Retiree Health Subsidy

May 4, 2010 (PLANSPONSOR.com) – Federal officials are appropriating $5 billion to pay for employer subsidies for retiree health care coverage until January 2014 when the subsidies called for in the health reform law actually kick in.

An Associated Press news report said effective next month, federal subsidies will allow employers to get back a major portion of the cost of medical claims for retirees ages 55 to 64 who are not yet Medicare eligible.Under the program, employers can get reimbursed for up to 80% cost of medical claims between $15,000 and $90,000 for their early retirees. The money can be used to reduce premiums for retirees and their dependents, or by employers to keep their own costs in check

“This is going to be a welcome reform for many businesses that are trying to do the right thing by their retirees, and for the retirees themselves,” President Obama said Tuesday, addressing a business group.

According to the news account, experts predict the reform law will lead to fewer retirees getting coverage from former employers since it will be easier for them to get and keep coverage on their own. “Employers have been offering these benefits because there is no alternative source of coverage,” said economist Paul Fronstin of the Employee Benefit Research Institute, in the news report. “I think they’re going to be asking themselves why they should continue offering retiree coverage.”

In addition to subsidies and new health insurance markets, the legislation improves Medicare benefits by gradually closing the prescription drug coverage gap called the “doughnut hole.” That will benefit retirees over age 65.

A number of companies have reported an earnings hit related to the new health care legislation. Under the 2003 Medicare prescription drug program, companies that provide prescription drug benefits for retirees receive subsidies covering 28% of eligible costs, but are allowed to deduct the entire amount they spent on these drug benefits — including the subsidies — from their taxable income.  The new bill allows companies to only deduct the 72% they spent on those programs (see Healthcare-Related Earnings “Hit” List Continues to Expand).