Who do you suppose is going to pay in the end?


By DAVID REILLY, ELLEN E. SCHULTZ And RON WINSLOW

AT&T Inc. said it would take a $1 billion charge against earnings tied to the federal health-care overhaul, joining a number of other companies in reporting an impact from the bill signed into law this week.

The charges relate to prescription-drug benefits for retirees. Companies that provide this benefit, as AT&T does, receive a federal subsidy, plus they can deduct the value of this subsidy from their taxes. The health overhaul cancels the deductibility of the subsidy.

It is for that reason that companies are taking a charge against earnings. They "have a stream of tax benefits that they are losing way out into the future," said Roland McDevitt, director of health-care research at benefits consultant Towers Watson.

On Friday, 3M Co. joined AT&T in saying it would take a first-quarter charge, in 3M's case of $85 million to $90 million. Deere & Co., Caterpillar Inc. and AK Steel Holding Corp. also said they were taking such charges.

AT&T's is much larger than the others' because it has far more current and future retirees, and a large number of them are unionized, with guaranteed benefits.

The charges are "noncash," meaning companies don't have to write a check. But ultimately their tax bills will be higher given the change in tax treatment of the drug-benefit subsidy.

The charges are related to a 2003 law providing a prescription-drug benefit under Medicare. At the time it was adopted, some companies were threatening to drop drug coverage for their retirees, since this would now be available through Medicare. Congress voted them a 28% tax-free subsidy for continuing to provide coverage to retirees eligible for Medicare.

The subsidies caused the cost of companies' obligations for retiree benefits to decline. AT&T, for example, saw its obligation drop by $1.6 billion at the time.

The cost of providing retiree prescription-drug coverage was already tax-deductible before the 2003 law. After that law was signed, companies remained able to deduct the cost of providing the benefit, including the portion paid for by the subsidy.

The current health-care overhaul doesn't eliminate the subsidy, nor make it taxable. What it changes is that companies will no longer be able to deduct the portion of the drug benefit paid for by the subsidy.

Since companies had created an asset based on the expectation they would be getting these deductions over the lives of their current and future retirees, they say they need to take a charge reflecting the fall in the asset's value.

Accounting rules say the charges, which affect what are called "deferred tax assets," must be taken in the quarter in which a tax-law change is enacted. The first quarter ends Wednesday. Companies wouldn't have to announce the charges before they actually report their first-quarter earnings over the next several weeks. However, if they viewed the charges as material, they might feel they needed to inform shareholders immediately.

The one-time charges, running into the hundreds of millions of dollars, could add to the ongoing debate about the health overhaul's impact, even though the charges are noncash.

Mr. Zion of Credit Suisse estimated in a report this week that companies in the S&P 500 index will rack up a combined $4.5 billion charge due to the change in the value of the tax asset.
—Roger Cheng contributed to this article.
http://online.wsj.com/article/SB20001424052748704100604575145981713658608.html