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Elimination of tax deduction for the retiree drug subsidy (RDS)

Employers continue to watch how new provisions of the Affordable Care Act (ACA) will potentially impact their businesses. While some of these impacts may not be felt for years to come, many employers have been bracing for a change that may affect their bottom line in 2013. 


ACA eliminating tax deduction for retiree drug subsidies

Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, employers who sponsor group health plans that provide prescription drug benefits to their Medicare-eligible retirees have been able to receive a 28 percent tax-free retiree drug subsidy (RDS) from the federal government, plus deduct the subsidy from their corporate income tax.


However, as announced in 2010 when the ACA was signed into law, employers are no longer able to claim the deduction for RDS payments in 2013. The RDS subsidy is still available, but these payments are no longer tax-deductible.


What does this mean for employers?

Generally, the elimination of this deduction may increase the tax liability for employers and increase the overall cost of providing prescription drug coverage to Medicare-eligible retirees. For this reason, employers have been exploring other cost-effective group retiree drug coverage options like Wellmark's Group MedicareBlueSM Rx plans.


Group Part D plans continue to be attractive coverage options. ACA mandates the closing of the Part D coverage gap (donut hole), through a variety of initiatives, including the Coverage Gap Discount Program.


What should employers do next?

If you are an employer receiving RDS payments, you've likely already analyzed how the elimination of the RDS tax deduction may impact the tax liability of your organization. But it's always valuable to review the costs of providing retiree prescription drug coverage and evaluate other options.


Contact your Wellmark representative for assistance or to learn more about alternative drug coverage options for your retirees.


Where can I get more information?

Wellmark is here to inform, lead, assist and support you through all of the ACA's changes as you make your decisions about your group health plan. For more information about the elimination of the RDS tax deduction, call your Wellmark representative.



Wellmark is not providing any legal advice with regard to compliance with the requirements of the Affordable Care Act (ACA) or the Mental Health Parity Addiction Equity Act (MHPAEA). Regulations and guidance on specific provisions of the ACA and MHPAEA have been and will continue to be provided by the U.S. Department of Health and Human Services (HHS) and/or other agencies. The information provided reflects Wellmark's understanding of the most current information and is subject to change without further notice. Please note that plan benefits, rates, renewal rate adjustments, and rating impact calculations are subject to change and may be revised during a plan's rating period based on guidance and regulations issued by HHS or other agencies. Wellmark makes no representation as to the impact of plan changes on a plan's grandfathered status or interpretation or implementation of any other provisions of ACA. Any questions about Wellmark's approach to the ACA of MHPAEA may be referred to your Wellmark account representative. Wellmark will not determine whether coverage is discriminatory or otherwise in violation of Internal Revenue Code Section 105(h). Wellmark also will not provide any testing for compliance with Internal Revenue Code Section 105(h). Wellmark will not be held liable for any penalties or other losses resulting from any employer offering coverage in violation of section 105(h). Wellmark will not determine whether any change in an Employer Administered Funding Arrangement affects a health plan's grandfathered health plan status under ACA or otherwise complies with ACA. Wellmark will not be held liable for any penalties or other losses resulting from any Employer Administered Funding Arrangement. For purposes of this paragraph, an "Employer Administered Funding Arrangement" is an arrangement administered by an employer in which the employer contributes toward the member's share of benefit costs (such as the member's deductible, coinsurance, or copayments) in the absence of which the member would be financially responsible. An Employer Administered Funding Arrangement does not include the employer's contribution to health insurance premiums or rates.


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