You may have read about some companies (AT&T, Caterpillar, AK Steel and 3M) that have announced millions in first quarter charges related to the new health care reform law officially known as the Patient Protection and Affordability Act (PPACA). Expect to see such charges or disclosure in many MD&A’s this proxy season.
Whether or not your company has taken similar action, your board should be aware of the tax and accounting implications from the health care insurance overhaul. In a March 30 Webcast [archive available] co-hosted by KPMG’s Audit Committee Institute and the National Association of Corporate Directors, Terry Iannaconi, a partner in KPMG’s National Office and a former deputy chief accountant for the SEC, listed four accounting areas boards and audit committees in particular should worry about. KPMG’s Tax Practice also produced a publication on the health care act. [Access that report, Summary of Tax Provisions in Health Care Reform.]
Those items are:
• Tax implications to tax adjustments: “There will be a loss of a tax-free subsidy [for health care for retirees],” Iannaconi said. “Companies will be impacted negatively.” Companies that received that subsidy will have to pay more toward those benefits and will not be able to deduct the subsidy for certain retired drug prescription plans. That went into effect when the reconciliation bill was signed by President Barack Obama on March 30.
• Impact on accruals: Caps on post-employment benefits for retirees will be eliminated. That means that companies will have to account for more expenses for these retirees going forward. Iannaconi said this part of the law shouldn’t affect companies in the first quarter of this year.
• Fees on certain pharmaceutical and medical device companies: For pharmaceutical companies, there will be an annual fee on all covered entities (starting with $2.5 billion for calendar year 2011, increasing annually to $2.8 billion for calendar years 2012 and 2013; $3 billion for calendar years 2014 through 2016; $4 billion for 2017; $4.1 billion for 2018; and $2.8 billion for 2019 and later) based on their share of the branded prescription drug sales market for the previous calendar year. For medical device makers, there will be a 2.3 percent excise tax on certain medical devices. The pharmaceutical fee goes into effect next year and the medical device tax in 2013.
• Cap on deductibility of health insurer compensation: Corporate deduction for an employee’s compensation paid by a health insurer is limited to $500,000 per year; also applies to deferred compensation for services performed after 2009. This goes into effect in 2013.
In addition to KPMG’s white paper on health care reform, Towers Watson recently published a report. You can access that report here.
No matter what industry your company is in, it seems most likely that the health care reform law will affect your financial statements starting this year. Granted, the biggest impact would be early on in the rollout of the law, as shown by AT&T’s announcement last month.
The telecommunications company announced it would take a $1 billion charge in the first quarter on health-care-related costs. 3M announced it will take a one-time expense of $85 million to $90 million after tax, or about 12 cents a share, in the first quarter because of the new law, according to a statement. [Read Bloomberg article here.]
Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…