April 1, 2010 / 8:13 PM / in 8 years

Factbox: Healthcare law change: loophole or tax?

(Reuters) - Some U.S. companies are taking tens of millions of dollars in charges to compensate for a change in the tax treatment of a federal prescription drug subsidy under the new healthcare reform law.

An industry group is urging the federal government to repeal that section of the law saying it would raise costs for corporations and could hurt the economy. Affected companies say it amounts to a tax increase. The Obama administration argues the measure merely closes a loophole that lets companies receive a tax-free subsidy and then take a deduction for it.

Following are highlights of the issue over the subsidy, which came into force after former President George W. Bush signed a Medicare prescription drug benefits law. Medicare is a federal health insurance program covering elderly and disabled Americans.

* The 2003 law provided a 28-percent subsidy, tax-free, from Medicare funds to companies for giving retirees a prescription drug benefit. The new healthcare law keeps that intact.

* Corporations were also allowed to deduct the amount of the subsidy from taxable income. The new healthcare law will no longer allow that.

* The healthcare overhaul became law last week, but this specific provision does not go into effect until 2013. However, some big U.S. companies said they will record multimillion dollar charges for the first quarter this year to meet accounting standards.

* With the tax deduction eliminated, the firms say they must adjust the estimated cost of the retiree prescription drug benefit. Accountants say this is essentially a one-time charge that the firms will take for current retirees.

* Retirees who do not get prescription drug benefits from their companies are still eligible to receive the benefits from Medicare Part D, which is the federal program to subsidize prescription drug costs for Medicare beneficiaries.

* The American Benefits Council, which opposed the change in the new healthcare law, said it could adversely affect retirees who have more generous prescription drug benefits from their employers than Medicare provides if the firm decides not to offer it anymore.

The council said the change also hurts companies by raising the cost of providing the benefit to retirees. And it could adversely affect the federal government, which could see higher spending on Medicare Part D if companies pull back from offering retirees the prescription drug benefit.

* The White House says the provision closes a loophole that was basically providing what amounted to two deductions for corporations -- the tax-free subsidy and then allowing the subsidy to be deducted from taxable income.

Reporting by Tabassum Zakaria in Washington; Editing by David Alexander and Paul Simao

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