Healthcare Reform changes Financial Reporting in 1Q10 for Medicare Part D subsidy

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Healthcare Reform changes Financial Reporting in 1Q10 for Medicare Part D subsidy Resources Global Professionals Finance & Accounting Blog Friday, March 26. 2010 Healthcare Reform changes Financial Reporting in 1Q10 for Medicare Part D subsidy On March 23, 2010, President Obama signed into law HR 2590, the Patient Protection Affordable Care Act and on March 25, 2010, Congress passed HR 4872, Reconciliation Act of 2010, which amends HR 2590. Together, this ended the tax-deductibility of retiree drug benefits to the extent offset by a tax-free subsidy. In addition, to a one-time adjustment in the period of enactment (1Q10) to deferred taxes, future retiree drug benefit accruals for companies receiving the subsidy will have smaller associated tax benefits (ie, a likely higher effective tax rate for impacted companies).

The specific provision relates to the Medicare Part D subsidy paid by the government to certain companies. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, provided certain drug benefits to recipients of Medicare. Additionally, this act included an annual tax-free subsidy to companies that provided actuarially equivalent benefits. The subsidy was tax-free, plus companies were allowed to fully deduct the benefits they paid to retirees. At the time, FASB issued FSP No. 106-2, which required that companies treat the subsidy as a permanent tax difference, which reduces the tax provision.

Under Healthcare reform, the subsidy is no longer tax-free, as it disallows a tax deduction for the company's costs that are offset by the subsidy. This change is effective for taxable year's beginning after December 31, 2012. Accounting rules require that companies record the tax impacts on the date of enactment. This means that the loss of the subsidy would reduce deferred taxes as of 1Q10, and the impact would be calculated assumed that it would begin to impact tax expense in 2013. If the company had a valuation allowance associated with the subsidy, the reversal of the valuation allowance may partially offset the charge. This charge would be a one-time charge in the period of enactment and would reflect the loss of the tax deduction related to the existing liability recorded for future retiree prescription drug coverage.