Tussle over health care law impact on companies

By Ben Rooney, staff reporter


NEW YORK (CNNMoney.com) -- A growing number of major U.S. corporations are expecting to take tax charges in the first quarter related to the recently enacted health care reform law.

But while some companies are fretting about the charges, defenders of the law say the new rules merely close a loophole that allowed a double-dip benefit.

On Wednesday, Boeing (BA, Fortune 500) became the latest company to disclose that the law, which was signed by President Obama last week, will negatively impact its financial results.

The aeronautics company expects to take an income tax charge of roughly $150 million, or 20 cents per share, in the first quarter of 2010 as a result of the law.

AT&T (T, Fortune 500) said last week that it expects to book a $1 billion charge in the first quarter in anticipation of costs resulting from health care reform. That came after similar announcements from Deere (DE, Fortune 500) and Caterpillar (CAT, Fortune 500).

The charges stem from a part of the law that eliminates tax deductions for Medicare prescription drug subsidies.

When the Medicare prescription drug program was passed in 2003, it included a provision granting employers a subsidy of 28%, or up to $1,330, per retiree for prescription drug costs.

Even though the federal subsidies were already tax free, employers could still write them off on their income taxes, in addition to writing off their own contribution. The new law maintains the subsidy as a tax-free incentive to employers, but prohibits them from taking it as a deduction.

While the provision does not go into effect until 2013, the companies said accounting standards require that the charges be recorded during the period in which the law was signed.

Obama administration officials have defended the change by arguing that the previous law essentially allowed for two deductions - one for the employer's own contribution, and another for the tax-free federal subsidy.

"This bill, our bill simply closes the loophole and allows them to deduct that money one time by not counting it as income," said White House spokesman Robert Gibbs in a news conference last week.

However, critics of the provision say the financial hit will force companies to delay hiring and scale back benefits for existing employees.

"This is potentially devastating news for unemployed Americans who are waiting for the job-creating engine of our economy to rev up again," Tom Donohue, president of the U.S. Chamber of Commerce, wrote in a letter to members of the Chamber's board Monday.

In addition, critics say removing the subsidy will deter employers from providing full health care benefits, which would force more workers to rely on Medicare and end up shifting the cost to the public sector.

"The government will soon find out that by raising the cost for these companies they're incenting employers to drop these plans and send their employees into the Medicare program," said Chamber spokeswoman Blair Latoff.

AT&T highlighted those concerns last week when it said it's considering unspecified changes to its employee benefit as a result of the legislation. But a spokesman for Boeing, John Dern, said the company currently has no plans to alter its employee benefits.

-- CNNMoney.com staff reporter Annalyn Censky contributed to this report.

An early version of this story misstated who the letter was addressed to. CNNMoney.com regrets the error. To top of page

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