The Retiree Drug Subsidy (RDS) was always a mixed blessing for employers. With tax changes starting in 2013 that tilted the balance further toward “more trouble than it’s worth,” employers are getting ready to flee – if they can just find a better spot to land.
As a health insurance agent, stepping up to the plate with a strategic solution can deepen your relationship with current customers and broaden your business to new ones. There should be plenty of new business to capture, judging by the federal government’s own estimates. More than 4 million of the current 6.2 million lives now covered by RDS are expected to disappear from that category by 2014.
Fortunately, recent federal guidance regarding the advantages of another option gives advisors and agents a solid alternative to recommend. One type of Employer Group Waiver Plan (EGWP+Wrap, often called Egg Whip Plus Wrap) allows employers to continue to offer their same health benefits to their retirees while lowering costs and reducing future obligations.
What went wrong with RDS?
Looking back, RDS always sounded better than it actually performed. After creating Medicare Part D drug coverage, the federal government was eager to keep employers who already covered their retirees better than the CMS base plan from abandoning their plans and shifting the burden to the government. The subsidy was designed to convince employers it was better financially to go on providing coverage.
Under the subsidy, the government covered up to 28 percent of approved costs. Not only was the federal payment tax free, but the employer could write off 100 percent of the costs – even the portion covered by the subsidy – as well as the administrative costs of complying with government regulations. However, that administrative burden was heavy, with annual reporting requirements, attestations and other hoops to jump through.
The disenchantment with RDS only grew when the Patient Protection and Affordable Care Act of 2010 was passed. One of its provisions eliminated an employer’s ability to write off the RDS payment provided by the government; policymakers said they were merely closing an unintended loophole. Another made the administrative costs no longer deductible. Both provisions are slated to take effect in 2013.
The end result is a badly diminished subsidy. At one time, the subsidy was estimated to be worth about $500 per Medicare beneficiary to employers. Its value is now far less, as indicated by the dozens of companies that had to restate their future tax liabilities soon after the provisions were signed into law. Although federal estimates put the cost to employers at $4.5 billion, AT&T alone restated its future tax obligations as $1 billion greater.
How to position EGWP+Wrap