The New Health Care Law and the Medicare Part D Retiree Drug Subsidy

By Rachel Yin, CPA

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act. 1 On March 30, 2010, he signed the Health Care and Education Reconciliation Act of 2010, 2 a bill to make changes to the Patient Protection and Affordable Care Act. These two acts are the primary vehicles of health care reform.

Within weeks after the laws were passed, some companies that provide employees with health care in retirement announced noncash one-time accounting charges resulting from changes to how Medicare subsidies will be taxed (see Exhibit 1). However, some companies that receive the Medicare Part D retiree drug subsidy have not yet taken a charge because the legislation is new and subject to changes.

A company that provides employees with health care coverage in retirement is required under accounting standards applicable in the United States to recognize the liability for this retirement benefit during the employees’ active service periods. These accounting standards require the company to estimate the cost of providing health care coverage from the time an active employee retires until that employee’s death. The company recognizes this estimated cost over the period that the employee provides service to it. For each period that the company reports results, it includes an expense for this obligation and recognizes the anticipated tax benefits associated with paying the health care costs sometime in the future. Under current tax law, companies can receive a 28% tax-free subsidy under Sec. 139A when paying for prescription drug coverage, up to $1,330 per year per retiree. When companies spend the tax-free federal subsidy on benefits, the federal subsidy does not reduce an employer’s income tax deduction for the costs of providing such prescription drug plans nor is it subject to income tax individually.

The health care legislation eliminates this favorable tax treatment for the drug subsidies. Under the law, beginning in 2013, a company’s tax deduction for covered retiree prescription drug expenses will be reduced to the extent these expenses are reimbursed under the retiree drug subsidy program. Thus, the subsidy payments will be treated like most other payments that are excludible from income.

Impact in Year 2010

Although this change in the tax treatment of retiree drug subsidies is not effective until 2013, under applicable U.S. accounting standards the deferred tax asset that accumulated as retirement health care costs were recognized in operating results will need to be reduced in the period that the law is enacted, even though the changes are not effective until future periods. This will be a one-time charge to the income statement. A portion of the accumulated actuarial gains or losses caused by the retiree drug subsidy will be recorded in accumulated other comprehensive income. Exhibit 2 explains the origin of this one-time charge incurred by companies that receive the federal subsidy without considering the effect of the accumulated actuarial gains or losses.

The income statement impact is the tax treatment of the difference in the retirement benefit obligation for prescription drug coverage with and without the tax-free subsidy. Companies will record the difference as a discrete event in the interim period, which for most companies 3 is the period ending on or after March 30, 2010. For companies that have a valuation allowance against their deferred tax assets, the new law will have no impact on their financial statements.

Impact in Year 2013

Beginning in 2013, an employer’s income tax deduction for the costs of providing Medicare Part D equivalent prescription drug benefits to retirees will be reduced by the amount of the federal subsidy. The government offered the subsidies so that more companies would continue to offer coverage to retirees and keep them off government-funded Medicare Part D. Many observers have commented that this could significantly increase government health care costs because companies may be compelled to drop or curtail current benefit levels.


1 Patient Protection and Affordable Care Act, P.L. 111-148.

2 Health Care and Education Reconciliation Act of 2010, P.L. 111-152.

3 Due to the difference in the enactment dates of the Patient Protection and Affordable Care Act (March 23, 2010) and the Health Care and Education Reconciliation Act (March 30, 2010), companies with periods ending between the two dates technically are required to report the change in two periods. However, the SEC has indicated that it will not object to registrant companies with period end dates falling between March 23 and March 30 to report the change in the period ending on or after March 23, 2010 (FASB Accounting Standards Update No. 2010-12, Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts, adding ASC ¶740-10-S99-4, SEC Staff Announcement, “Accounting for the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act” (April 2010)).


Rachel Yin is a senior manager with Amper, Politziner & Mattia, LLP, in Edison, NJ. For more information about this article, contact Ms. Yin at

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.