Tax-free money: the Medicare retiree drug subsidy.

• Author: Kalis, Jr., Frank J.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), P.L. 108-173, amended Title XVIII of the Social Security Act (SSA) by establishing Part D: Voluntary Prescription Drug Benefit Program. This program adds certain prescription drugs to the benefits covered under the Medicare program, effective Jan. 1, 2006. In addition to prescription drug benefits covered either by private drug plans or through a Medicare plan, the MMA also authorized a Medicare Retiree Drug Subsidy (RDS) program for qualifying group-health-plan sponsors. It also created Sec. 139A, which excludes payments received under the Medicare RDS program from taxable income.

Medicare RDS

The Medicare RDS is aimed at employers and unions (collectively, "employers") that offer private prescription drug coverage to their retirees and other qualified individuals (collectively, "retirees") under a group health plan. The RDS provides financial incentives, in the form of direct payments, to employers to continue to provide prescription drug benefits for their retirees, instead of abandoning the plans in response to the inclusion of such benefits under Medicare. Both tax-exempt and taxpaying employers and unions are eligible for subsidy payments, which are intended to reduce or eliminate employer costs of contributions to prescription drug coverage plans for retirees.

The subsidy can be claimed for each individual enrolled in the employer's plan who is eligible for Part D but elects not to enroll in it. The subsidy payments equal 28% of each qualifying retiree's allowable prescription drug costs attributable to gross prescription drug costs between the applicable cost threshold and cost limit (for 2006, between $250 and $5,000 per retiree; the amounts are adjusted annually based on average per-capita aggregate expenditures for Plan D drugs by eligible beneficiaries for plan years ending after 2006). The allowable retiree's prescription drug cost is the amount actually paid by the drug plan or the retiree (or on the retiree's behalf), net of any discounts, chargebacks, rebates or other similar price concessions. The computation of the subsidy payment to the employer applies not only to amounts actually paid by the plan or the employer, but also to a retiree's payments. In December 2005, the Center for Medicare and Medicaid Services (CMS), which administers the subsidy program, provided guidance for the treatment of account-based health arrangements under the...