Congressmen Harass Companies For Attempting To Comply With Health Care Law Changes

April 2010

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The Patient Protection and Affordable Care Act eliminates a previous tax benefit for retiree drug benefits. Promptly after passage, a number of corporations announced accounting charges caused by the new law. The write-offs occurred because the previously-recorded liabilities were appropriately recorded net of tax, so a change in the tax law changes the calculation.

Towers Watson, the notable human resource consulting firm, estimated financial statement write-offs will be $14 billion for a total of 3,500 companies. Companies announcing increased tax costs include:

AT&T - $1 billion
Deere & Company - $150 million
Boeing – $150 million
Caterpillar - $100 million
3 M - $90 million
AK Steel - $31 million
Valero - $15-$20 million
Goodrich - $10 million

This accounting treatment is specifically required under Generally Accepted Accounting Principles (GAAP). The requirements come from Financial Accounting Standards 106, entitled “Employers' Accounting for Postretirement Benefits Other than Pensions” (Issued December 1990). This accounting pronouncement requires what Towers Watson and the above companies report. Had these companies not followed these accounting rules, they would be in violation of various securities and other laws.

The summary of Statement 106 explains:

“Although it applies to all forms of postretirement benefits, this Statement focuses principally on postretirement health care benefits. It will significantly change the prevalent current practice of accounting for postretirement benefits on a pay-as-you-go (cash) basis by requiring accrual, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. …
This Statement requires that an employer's obligation for postretirement benefits expected to be provided to or for an employee be fully accrued by the date that employee attains full eligibility for all of the benefits expected to be received by that employee, any beneficiaries, and covered dependents (the full eligibility date), even if the employee is expected to render additional service beyond that date. That accounting reflects the fact that at the full eligibility date the employee has provided all of the service necessary to earn the right to receive all of the benefits that employee is expected to receive under the plan.”

The AFL-CIO and American Benefits Council (an advocate of employer sponsored benefit programs located in Washington DC) were aware of the tax provision that is causing these write-offs. The AFL-CIO and the American Benefits Council wrote to the Senate (where this tax change initiated) to warn that this change was a mistake. In a December 10, 2009 letter to Senate Majority Leader Harry Ried regarding “Proposed Change to the Tax Treatment of Retiree Drug Subsidies”, the president of the American Benefits Council and the Legislation Director of the AFL-CIO wrote:

“We are writing to express our serious concerns regarding Section 9012 included in the Patient Protection and Affordable Care Act and urge that it be deleted from the version of the legislation brought to the full Senate for consideration.
Including such a provision would only compound the enormous problems that would be posed for workers and employers by the provision that applies an excise tax on health benefits, a provision that both our organizations have protested strongly on multiple occasions.
Section 9012 would cease the current tax excludability of the 28 percent subsidy provided to employers who continue to provide prescription drug coverage to their retirees. If this provision becomes law, it will be highly destabilizing for retirees who rely upon employer sponsored drug coverage, it will impose a dramatic and immediate impact on company financial statements, and it will not raise the estimated federal revenue attributed to this change in tax law.
The current tax treatment of the subsidy was included in the Medicare Modernization Act of 2003 precisely to encourage employers to continue sponsoring drug coverage for retirees – not only helping to preserve this important benefit, but also resulting in savings to the federal government by avoiding the necessity of many retirees to obtain Medicare Part D coverage.
It is clear that in drafting Section 9012, the Senate was not aware of, and therefore not able to take into consideration, the significant negative impact, required under Financial Account Standard No. 109 [sic], on the financial statements of companies currently providing retiree drug coverage. Regardless of the effective date of the provision, accounting rules dictate that immediately upon being signed into law, this deferred tax liability would have to be reflected on company financial statements. This would substantially increase liabilities for the very companies providing the most comprehensive coverage to current and future retirees. In the current economic environment, this would be particularly ill-advised and disruptive. Moreover, it would compel many employers to cease offering the coverage and require their retirees to obtain coverage through Medicare Part D, at considerably greater cost to the government.
The immediate impact on financial statements, and resulting shift of retirees from employer sponsored plans to Medicare, is just one reason the $5.4 billion in federal tax revenue estimated to be raised from this provision is highly unlikely to be realized and, in fact, this proposal is likely to be a revenue losing provision. If the tax revenue to be collected is calculated, but the federal outlays to provide the comparable benefit are not appropriately taken into account, then the actual cost to the government is not being accurately considered. Independent calculations show that if as few as 24 percent of retirees are dropped from employer plans and obtain coverage through Medicare Part D, then Section 9012 will be a net revenue losing provision.
Health care reform must be about stabilizing and expanding the employer-sponsored health benefits system. Taxing the drug subsidy will have the opposite effect. Whatever differences the undersigned organizations may have on other aspects of the Patient Protection and Affordable Care Act, on this matter both labor and management are in full agreement. We respectfully urge that Section 9012 be deleted from the legislation under consideration.”

The most unfortunate part of this story is the reaction to these required write-offs by the White House and certain congressmen. The American Spectator reported the following reaction to the tax change and related accounting write-offs from a White House legislative analyst:

"These are Republican CEOs who are trying to embarrass the President and Democrats in general. Where do you hear about this stuff? The Wall Street Journal editorial page and conservative websites? No one else picked up on this but you guys. It's BS."

Similarly Secretary of Commerce Gary Locke penned an April 1, 2009 opinion article entitled " Don't Believe the Writedown Hype". The article criticized the companies' writedowns as "disingenuous".

In contrast to this complaint by the administration, few would characterize the AFL-CIO as “Republican CEOs who are trying to embarrass the President and Democrats".

Several congressional Democrats are acting on what they perceive is made-up accounting. The House Committee on Energy and Commerce will hold a hearing for the purpose of investigating the companies announcing large write-offs. The only reasonable explanation of the hearings and the letter quoted below is that the Congressmen (i) are unaware of the contents of the legislation for which they voted, and (ii) did not bother to check their facts before issuing the demands for documents and appearances described below.

Here are portions of a March 26, 2010 letter from Representatives Waxman and Stupak that was sent to Deere, Caterpillar, Verizon, and AT&T. Each of the four letters is identical except for identifying information and amounts for that company:

“After the President signed the health care reform bill into law, your company announced that provisions in the law could adversely affect your ability to provide health insurance. [Name of company] stated in an SEC filing that its after-tax earnings for fiscal year 2010 will decrease by [amount for that company] as a result of the law. ...
The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern. They also appear to conflict with independent analysis. The Congressional Budget Office has reported that companies that insure more than 50 employees would see a decrease of up to 3% in average premium costs by person by 2016. ...
The subcommittee on Oversight and Investigations will hold a hearing on April 21, 2010 ... We request your personal testimony at this hearing. To assist the Committee in its preparation for this hearing, we request that you provide the following documents from January 1, 2009 through the present: ... We also request an explanation of the accounting methods used by [name of company] since 2003 ..., including the accounting methods used in preparing the cost impact released by [name of company] this week.”

Regardless of whether one supports the recent health care legislation or not, companies who are accounting for the tax increases in the health care law should not be investigated because of their tax and accounting compliance. The CEOs of the companies summoned by Representatives Waxman and Stupak have much better things to do. Rather than continue with the hearing, Congress should review (i) the AFL-CIO letter (see above for full text), (ii) the law that Congress passed, and (iii) the related accounting rules that require these write-offs.

Fulcrum Inquiry is a licensed CPA firm. Our services include investigating accounting irregularities and related expert testimony.