Inflation Reduction Act retirement and prescription drug benefit implications

On August 16, President Biden signed the Inflation Reduction Act into law, just days after the Senate approved it by a vote of 51 to 50, with Vice President Kamala Harris casting the tie-breaking vote, and the House approved it by a vote of 220 to 207. The legislation includes a 15% corporate alternative minimum tax, an excise tax on stock buybacks, authorization for the Department of Health and Human Services (HHS) to negotiate certain prescription drug prices for Medicare beneficiaries, an insulin safe harbor for health savings account (HSA)-qualifying high-deductible health plans (HDHPs), changes to the Medicare Part D benefit and other provisions.

The legislation’s key provisions are discussed below and will take effect over several years, beginning in 2023. The corporate alternative minimum tax, excise tax on stock options and insulin safe harbor for HDHPs will take effect in 2023.

Corporate alternative minimum tax

• 15% alternative minimum tax for certain corporations: A 15% alternative minimum tax will be imposed on corporations that have an average adjusted financial statement income of $1 billion, calculated over a three-year period.
• Adjustments to financial statement income for retirement benefits: Adjusted financial statement income will mean the net income or loss reflected on the year’s financial statements, with certain adjustments specified in the legislation, including adjustments related to pension and post-employment benefits.
  • Adjusted financial statement income will be adjusted to disregard income, cost or expense that would otherwise be included on the financial statement relating to a qualified defined benefit (DB) plan other than a multiemployer plan, a qualified foreign plan and any other DB plan that provides post-employment benefits other than pension benefits. Adjusted financial statement income will also be reduced by deductions that are allowed under other tax law provisions relating to a covered benefit plan (i.e., typically contributions to these plans). It appears that none of these adjustments apply for nonqualified U.S. DB plans.
  • As a result, qualified DB pension plans and other non-pension DB benefit plans would be treated for purposes of the alternative minimum tax the same way they are treated for regular federal income tax purposes: Typically deductions would be based on contributions, not on ASC 715 (or other financial statement regime) benefit cost.
  • These adjustments would apply both for purposes of determining whether the corporation is subject to the tax and in calculating the amount of the tax.
• Effective date: The provision will take effect for taxable years beginning after December 31, 2022.

Excise tax on certain stock buybacks

• 1% excise tax: In general, publicly traded corporations that repurchase more than $1 million in stock will be subject to an excise tax of 1% of the stock’s fair market value.
  • The fair market value of repurchased stock will be reduced by the fair market value of any stock issued by the corporation during the taxable year, including the fair market value of stock issued or provided to employees.
  • The excise tax will not apply in cases where the repurchased stock (or an amount equal to its value) is contributed to an employer-sponsored retirement plan, employee stock ownership plan or similar plan.
• Effective date: The excise tax will apply to stock repurchases that occur on or after January 1, 2023.

Prescription drug price negotiation

• Limited drug price negotiation for Medicare: The HHS Secretary will establish a program to negotiate the price of certain prescription drugs for Medicare beneficiaries. Under the Drug Price Negotiation Program:
  • High-cost single-source drugs and biologics without generic or biosimilar equivalents that have been approved by the Food and Drug Administration and available for at least seven years (11 years for biologics) may be selected for negotiation.
  • The Secretary will rank eligible prescription drugs according to the total expenditures for the drugs under Medicare Parts B and D, select drugs for price negotiation and enter into agreements with manufacturers.
  • Manufacturers of selected drugs will pay an excise tax of up to 95% of the drug’s sales if they fail to negotiate.
  • When fully implemented, negotiated prices will be available in Medicare plans: prescription drug plans, Medicare Advantage plans, Medicare Advantage prescription drug plans and Medicare Part B.
• Implementation: Initially, 10 Medicare Part D drugs will be selected for the program, with negotiated prices applying in 2026, ramping up to 15 Part D drugs in 2027, 15 Part D or Part B drugs in 2028, and 20 Part D or Part B drugs in 2029 and later years.

Prescription drug inflation rebates

• Required rebates if the drug prices rise faster than inflation: Manufacturers of certain drugs with prices that increase more than the rate of inflation will be required to pay rebates to the federal government, beginning in 2023.

Insulin: HDHP safe harbor and Medicare cost-sharing restrictions

• Insulin safe harbor for HDHPs: HSA-qualifying HDHPs will be permitted to cover insulin before the annual deductible is satisfied.
  • The provision partially codifies previous guidance that expanded the items and services that are considered “preventive” for purposes of HSA eligibility.
  • The previous guidance allowed HDHPs to cover insulin — as well as other items and services for chronic conditions — before the deductible is satisfied.
• Effective date: The provision will take effect for plan years beginning after December 31, 2022.
• Insulin cost sharing under Medicare: In general, cost sharing for insulin for Medicare beneficiaries will be limited to the lesser of $35 per month or 25% of the lowest cost. The $35 limitation takes effect in 2023; the 25% limitation will take effect in 2026.

ACA premium tax credit eligibility

• Expanded eligibility for Affordable Care Act (ACA) premium tax credits will be extended through 2025, rather than sunsetting at the end of 2022 under prior law.
• Eligibility for the premium tax credits was expanded by the American Rescue Plan Act (ARPA).
• In general, ARPA reduced the amount that credit-eligible households are required to pay toward premiums and allowed households with income greater than 400% of the federal poverty level to qualify for premium tax credits.

Medicare Part D benefits

• In general, the out-of-pocket limit for Medicare Part D beneficiaries will be $2,000 beginning in 2025.
• The 5% coinsurance that Part D beneficiaries currently pay during the catastrophic phase of the Part D benefit will be eliminated in 2024.
• Part D plans will be required to pay a higher share of costs for beneficiaries who have reached the out-of-pocket limit. Plans will be required to pay 60%; drug manufacturers will pay 20%, and Medicare will pay 20%.

Other provisions

• The Medicare rebate rule (published on November 30, 2020) will be delayed until 2032.
• Medicare Part D will cover adult vaccines without cost sharing.

Going forward

Employers should review the retirement and healthcare-related provisions of the Inflation Reduction Act and take appropriate action based on their individual plan provisions.

Authors

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Ann Marie Breheny

Senior Legislative Advisor

email Email phone +1 703 258 7420

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Gary Chase

Director, Retirement and Executive Compensation

email Email phone +1 212 309 3802

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Benjamin Lupin

Senior Regulatory Advisor, Health and Benefits

email Email phone +1 215 316 8311

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Maria Sarli

U.S. Retirement Resource Actuary

email Email phone +1 404 365 1708

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