Why The Subsidy Stopped Boosting The Deduction.
Before 2013, a sponsor could ignore the excluded subsidy when figuring its deduction for drug costs. The Affordable Care Act removed that rule. This page explains the timeline and the IRS examples.
What Changed And When.
General information, not legal or tax advice. Check the cited sources before you act.
Retiree Drug Subsidy Overview
The series hub, with every topic and source in one list.
The Exclusion Itself
The sentence of section 139A that still stands.
Comparing The Alternatives
How the subsidy stacks up against an EGWP.
What Congress Removed.
As originally enacted, section 139A had a second sentence. It barred treating the section as relevant when deciding whether a deduction was allowable for any cost used to calculate the payment. In practice, that let a sponsor deduct the retiree drug cost it incurred while also excluding the subsidy that offset part of it.
Public Law 111-148, title IX, section 9012(a), signed March 23, 2010, struck that sentence. Under section 9012(b), as later amended by Public Law 111-152 section 1407, the change applies to taxable years beginning after December 31, 2012. The amendment notes on the Code section record both points.
How The IRS Applies The Cutover.
In its question-and-answer page, the IRS ties the treatment to the year the cost was incurred. A sponsor that received a payment in 2013 for 2012 costs may still disregard it under the earlier rule. For 2013 costs, the deduction must be reduced by the subsidy the sponsor has a right to receive. Where a taxable year is split, costs before 2013 follow the old rule and later costs follow the new one.
Reconciliation adjustments follow the same logic, according to the IRS. Additional subsidy for 2012 costs may be disregarded. Additional subsidy for 2013 costs is generally reported as income in the year of reconciliation to the extent the tax benefit rule requires. A repayment of excess subsidy for 2013 costs lets the sponsor claim the additional deduction in the year it repays.
What It Means For Sponsors.
The net effect, as the IRS describes it, is that the sponsor’s deduction is reduced by the subsidy it receives or has a right to receive. The subsidy remains untaxed, but it stops producing an additional tax benefit. For a sponsor that pays income tax, the after-tax value of keeping the subsidy is lower than it was before 2013. A sponsor that pays no income tax may notice little difference, though that depends on its status and is worth confirming.
That shift is one reason sponsors compare the subsidy with other ways of delivering retiree drug coverage, which the last page in this series covers. The IRS examples assume accrual accounting and a plan that is not a VEBA or other welfare benefit plan, so a trust-funded arrangement needs its own review.
Checks Worth Running.
Find out whether your accounting reflects the post-2012 rule. Confirm the years your reconciliations relate to, because the treatment of additional payments or repayments depends on which year’s costs they cover. Keep the IRS question-and-answer page and your CMS final payment statements together in one file.
We can assemble claims and payment data by plan year. Your tax adviser decides what belongs on the return, and an actuary or accountant can confirm the cost allocation behind each figure.
One more check concerns timing. The IRS addresses split taxable years in its question-and-answer page, so a plan year that straddles the change needs line-by-line attention rather than a single rule applied to the whole year.
Related Rules And Tools.
Affordable Care Act for Employers
The employer mandate, reporting and the other ACA duties in one place.
A Compliance Calendar for Your Plan Year
A plan-year view of the dates employers need to track.
Employer Group Waiver Plans (EGWPs) For Retiree Medicare Coverage
How employers use EGWPs to deliver retiree Medicare drug coverage.
Laws And Sources
26 U.S.C. 139A — The Code section: the exclusion sentence, with the amendment note for Public Law 111-148 section 9012 and its effective date.
Public Law 111-148 — The Patient Protection and Affordable Care Act, approved March 23, 2010, whose section 9012 amended section 139A.
Public Law 111-152 — The Health Care and Education Reconciliation Act of 2010, whose section 1407 amended the effective date of that change.
IRS, Frequently Asked Questions: Retiree Drug Subsidy — The IRS explanation of the exclusion, the post-2012 deduction rule and reconciliation examples.
IRS, Affordable Care Act Tax Provisions — The IRS page that lists retiree drug subsidies among the tax provisions it tracks.
General information, not legal or tax advice.
Quick Answers.
Short replies on this page’s topic, each tied to a fuller guide.
Did the ACA make the subsidy taxable?
No. It removed the second sentence of section 139A, which dealt with deductions. The exclusion from gross income remains in the Code.
Which years does the change cover?
Taxable years beginning after December 31, 2012, under section 9012(b) of Public Law 111-148 as amended by section 1407 of Public Law 111-152.
Where do I find the IRS examples?
In the IRS Frequently Asked Questions on the Retiree Drug Subsidy, which walks through 2012 costs, 2013 costs and reconciliation adjustments.
The Rest Of This Series.
What The Subsidy Is
The sponsor, the qualifying retiree and the 28 percent payment, explained from the statute.
The Section 139A Exclusion
What section 139A says, where it came from and what it leaves open.
Application And Reconciliation
Applying to CMS, interim payments, final cost data and the records to keep.
RDS, EGWP And Creditable Coverage
Where the subsidy, an employer group waiver plan and creditable coverage notices part ways.
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