Many large and midsize employers are excited about the new federal subsidy for qualified retiree pharmacy programs.
But benefits advisors should make sure to inform clients that another strategy, setting up a pharmacy supplemental plan, could generate more savings and less risk.
When members of Congress were evaluating the cost of adding a Medicare pharmacy benefit provision to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), they wanted to avoid financing the benefit for retirees who already were receiving pharmacy coverage through an employer-sponsored plan.
A 28% federal subsidy was included in the final legislation to create an incentive for companies to continue to provide retiree pharmacy benefits. The subsidy will generate tax-free revenue for qualified plans equal to 28% of the prescription drug costs for incurred claims between $250 and $5,000 for qualified retirees in 2006. For a typical company, this is likely to equal about $600 for each Medicare-eligible retiree and dependent that the plan covers.
Companies that opt for this subsidy should realize that there are a number of costs and risks associated with applying for it:
An annual attestation is required to certify that the plan being offered is at least actuarially equivalent to the standard Medicare Part D benefit. A federal mandate requires that retirees who receive the benefit be notified annually that their benefit is a qualified plan. Plans that are not qualified will need to be altered in order to receive the subsidy. These additional administrative costs will add up over time, especially for companies that offer several retiree medical options.
The company must pay for the process of applying for the subsidy, and the calculations and underlying data are subject to federal audit. The audit may require the company to substantiate the basis for the subsidy calculation and documentation of retiree eligibility. That means record keeping will be important for companies that go this route.