North Carolina-based companies Progress Energy and Goodrich are echoing claims made by AT&T, Verizon, John Deere, and Caterpillar that a provision in the Patient Protection and Affordable Care Act is going to cost them millions.
The two telcom providers and the two equipment makers were among the large U.S. companies causing a stir in March when they announced that the health care law would change the tax treatment of federal subsidies companies receive for providing prescription drug coverage to retirees. To comply with Securities and Exchange Commission reporting requirements, the companies announced to shareholders that reducing the subsidy would cost more than $1.5 billion overall and that they would take a non-cash charge against their earnings in the current quarter.
Also in March, Bloomberg reported that benefits consultant Towers Watson estimated that the change in tax law could trim corporate profits by $14 billion.
When Congress passed a Medicare prescription drug benefit in 2003, it offered to subsidize businesses that already provided the benefit to keep them from dumping their employees into the new government program. The subsidy is 28 percent of the cost of benefit.
Until now, the subsidy was tax-free and also could be deducted from a company’s taxable income. Under the new legislation, the subsidy will no longer be deductible.
White House Communications Director Dan Pfeiffer calls the tax-exempt, tax-deductible status of the prescription drug subsidy “double-dipping,” citing the headline from a New York Times editorial.
Call it whatever you want, said Joe Coletti, the John Locke Foundation’s director of health and fiscal policy studies, it’s still a loss companies have to account for.
Progress Energy spokesman Mike Hughes told Carolina Journal the Raleigh-based utility plans to account for a one-time charge of between $20 million and $25 million when the tax first is collected in 2013.
Charlotte-based Goodrich Corporation, a global supplier of aerospace and defense systems, issued a press release warning investors of a similar one-time charge of $10 million. Vice President Lisa Bottle said Goodrich is “watching and waiting” to see what other effects the legislation will have on the company’s earnings.
A spokeswoman for another Raleigh-based Fortune 500 company, Martin Marietta Materials, a producer of aggregate and other construction materials, said a portion of its employees receive the prescription drug benefit, but she wasn’t allowed to say how many or what the tax change would cost.
The company, along with several others contacted by CJ, is in its “quiet period” — the four-week period before companies release their quarterly earnings reports; during that interval, the SEC requires them to remain silent on any information that could affect stock prices.
BB&T, headquartered in Winston-Salem, also is in its quiet period. Spokeswoman Cynthia Williams would not confirm whether the bank provided the prescription drug benefit. Asked about other financial impacts healthcare reform might have on the company she replied, “It’s too early for us to know. We’re still assessing the impact.”
Duke Energy spokesman Tom Williams criticized other companies for making “premature” projections about their earnings.
“Some companies have gotten out ahead of things in our view and announced impacts based on guidance that may or may not be correct from the IRS,” Williams said.
Duke provides a retiree prescription drug plan, but Williams said he didn’t know whether it was subsidized or not.
“At this point we don’t know what the costs will be. We’re waiting for additional guidance from IRS and [the U.S.] Treasury,” Williams said. “We’ll have a sense about that included in our earnings report in the first part of May.
“There’s been lots of talk about it being a huge impact, but at this point we don’t know [the ] impact,” he added. “We know that it will be noteworthy, but whether or not it’s material is the question.”
White House Spokeswoman Moira Mack had no comment other than providing a link to Dan Pfeiffer’s White House Blog, which doesn’t deny the legislation will raise costs for corporations. Rather, it suggests corporations have been getting away with something, and that the new law will close the loophole that allowed them to do it.
Coletti said he’ll be interested to see if any of the companies decide to drop the benefit altogether, rather than give up a portion of the subsidy. Ending the benefit would transfer more retirees into Medicare, raising the cost to the taxpayers.
Sara Burrows is an associate editor of Carolina Journal.