Say goodbye to employer deduction for retiree drug subsidies?

Tucked away in the amended version of America’s Healthy Future Act of 2009 is a provision that would repeal the business deduction for federal subsidies for certain retiree prescription drug plans.

In case you didn’t know, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 created a retiree drug subsidy program to encourage employers and unions to continue providing high quality prescription drug coverage to their retirees. Employers who continue to maintain retiree health plans that provide prescription drug coverage can receive a tax-favored subsidy. The subsidy (which can be excluded from an employer's income) is equal to 28% of the allowable costs, including administrative costs, attributable to covered prescription drug costs incurred by a qualifying retiree of between $295 (cost threshold) and $6,000 (cost limit) in 2009.

Double dipping. The amended version of the Senate Finance Committee’s reform bill explains that employers may claim a business deduction for covered retiree prescription drug expenses incurred even though the employer excludes from income the subsidy allocable to such expenses.

This is apparently a deviation from standard tax practices. (It sounds like double dipping to me, which is a bad thing when onion dip or salsa is involved, but delightful when it comes to taxes (as allowed by law, of course!).)

The amended bill explains that the Internal Revenue Code provides an exception to these standard tax practices so that “the exclusion of the qualified retiree prescription drug plan subsidy from income is not taken into account in determining whether any deduction is allowable with respect to any covered retiree prescription drug costs that are taken into account in determining the subsidy payment.”

Repeal of the deduction. The amended bill would change this so that the amount otherwise allowable as a deduction for retiree prescription drug expenses would be reduced by the amount of the excludible subsidy payments received. The provision would be effective for taxable years beginning after December 31, 2010.