If you provide prescription drug coverage to retired employees, you could be rewarded for retaining this important component of your health plan. About 30 percent of Medicare beneficiaries have drug coverage through their former employers, and businesses that still offer retirees prescription coverage can take advantage of a tax-free subsidy by qualifying for Medicare Part D. Medicare Part D introduced prescription drug coverage, available to all beneficiaries, starting January 2006.
For every Medicare-eligible retiree who declines Medicare Part D in favor of your company’s coverage, you can receive tax-free returns equal to 28 percent of prescription drug expenses between $250 and $5,000, based on the amount the plan spends on retiree prescription costs.
Do you qualify?
Employers with the following categories of health plans that include retirees in prescription drug coverage can qualify: ERISA (Employee Retirement Income Security Act) group health plans; federal and state government plans; collectively bargained plans; and church plans. If an employer and a union maintain a plan jointly, and the employer is the primary source of financing, the employer is considered the sponsor for the purposes of the Part D subsidy.
Which expenses count toward the subsidy?
Subsidies are paid to employers only if Medicare-eligible employees choose the company plan over the Medicare plan. Prescription drugs costs incurred by retired employees who elect Part D coverage rather than the company plan are not figured into an employer’s tax-free subsidy.
Retired employees who have the option to maintain a company health plan and its prescription drug coverage still can enroll in Part D. Part D subsidies only provide tax-free returns to employers based on the prescription costs incurred by retirees who stay on the company plan.
How much can employers earn?
Employers can receive tax-free returns equal to 28 percent of actual prescription costs. This includes net discounts, charge-backs and average percentage rebates that the employer paid for Part D-covered drugs for each retiree between $250 and $5,000. Co-payments and other amounts paid by retirees also count.
This adds up for employers. Consider a retiree with $10,000 in Part D-covered prescription drug expenses. The subsidy takes into account costs after reaching the $250 deductible and not exceeding $5,000. Therefore, the employer can earn tax-free credit on $4,750 of the retiree’s drug costs. This amounts to $1,300 (28 percent of $4,750).
Qualify for Part D
The narrow window of time to qualify for this benefit means eligible individuals must act fast <m> before September 30, 2005. These steps walk you through the process.
- Are plans actuarially equivalent? Subsidy is available only if the sponsor plan’s is equivalent to Medicare Part D coverage. Not sure? Subtract the contributions or premiums paid by participants from the gross value of the coverage. If the net value of the sponsor plan is equal to or greater than the net value of Medicare Part D, it is actuarially equivalent and the sponsor can apply for the subsidy.
- Identify Medicare-eligible participants. Plan sponsors must identify both active and retired prescription drug plan participants who are eligible for Medicare Part D. Not sure who you should include on this list? The Centers for Medicare and Medicaid Services (CMS) can help if you enroll in their online data-sharing program.
- Apply for the subsidy. Deadline to apply to CMS is September 30, before which you must provide proof of actuarial equivalence.
Consult your benefits specialist for details on applying for actuarial evidence and for more details about Medicare Part D. Learn whether you qualify for the subsidy and how to enroll for tax-free returns on retiree prescription drug coverage. An employee benefits specialist can provide a complete review and consultation, and help you set up an enrollment and recording system to manage the process.
Jessica Galardini is COO of the Chambers of Commerce Service Corp. and executive vice president and COO of HRH Affinity Marketing Group. Reach her at (412) 456-7012.
