Policy-ish

Health Law Prompts Bigger Tax Bills For Some Firms

Some big-name corporations are setting aside some big money to deal with the aftermath of the new law overhauling health care.

Telecommunications giant AT&T said in a securities filing Friday that it would take a $1 billion hit to deal with an increase in company taxes due to the health law.

Earlier this week Caterpillar, Deere & Co. and AK Steel said they would be taking multimillion dollar charges of their own.

The issue is the elimination of a tax deduction for federal subsidies toward prescription drug benefits for retired workers. The subsidy reimburses companies up to $1,330 per retiree.

"Until now, companies could deduct the subsidy from their taxes, essentially getting a second benefit from the money, " the Wall Street Journal explained. The new law eliminates that deduction.

The favorable tax treatment of the subsidies until now is a legacy of the 2003 law that added a prescription drug benefit to Medicare. The tax deduction and the subsidies were meant to encourage companies that provided drug benefits to their retirees to keep doing so rather than to foist them onto Medicare.

Because of the new law, the subsidy will no longer be deductible, in effect lowering the payout companies can expect from the government each year. And though the tax tab doesn't hit until 2013, companies are making the changes to their books now.

The health overhaul limiting companies tax deductions for retiree drug benefits could raise billions of dollars of tax revenue over the next decade.

But the tax change could spur some companies to rejigger or drop drug benefits for retired workers, driving them to join the rolls of the Medicare drug plans. Companies that are locked into providing the benefits under contracts with unions are in a pickle, though. Indeed in January, Verizon and two unions wrote to Senate Majority Leader Harry Reid about their objections to the change.

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