Human Capital & Careers

Altria Expects Medicare Boon

The owner of Kraft Foods and Philip Morris says it will account for prescription-drug benefit subsidies under the new Medicare law.
Stephen TaubAugust 10, 2004

Altria Group expects to receive a $25-million cost reduction for retiree prescription drugs in the second half of 2004 from adopting an accounting rule related to a new Medicare law, according to the Associated Press, citing the tobacco giant’s recent government filing.

The parent company of Kraft Foods and Philip Morris said it has chosen to adopt in the third quarter ending Sept. 30 a new Financial Accounting Standards Board (FASB) accounting rule related to the new Medicare prescription drug law, the wire service reported. The law allows a subsidy of 28 percent of the total prescription-drug cost (up to $5,000 per retiree) for qualifying companies. In addition, employers won’t have to pay federal taxes on the subsidies.

While the law, formally known as the Medicare Prescription Drug Improvement and Modernization Act of 2003, doesn’t go into effect until 2006, the prospect of future subsidies has had an immediate accounting effect for some companies, reducing their estimates of future benefit liabilities under rules established by FASB.

FASB has advised employers to recognize future expected subsidies as a reduction in their future drug-benefit benefit obligations. When an employer first accounts for the subsidy, retiree medical costs will be reduced and the reduction should be accounted for as a gain in actuarial experience, amortized in the same way as any other experience gain under FASB Statement 106, according to a recent report by the law firm Seyfarth Shaw LLP.

Such accounting benefits are similar to the pension accounting under FASB.

Altria said about $20 million of the expected $25 million increase in net earnings from the Medicare accounting rule is related to Kraft Foods, according to the AP.