The RDS vs EGWP debate centers on the benefits derived from each strategy for the type of plan sponsor that is supporting it.


Retiree Drug Subsidies (RDS) offer plan sponsors a way to reduce costs for providing a pharmacy benefit plan for their retirees.  As part of the Medicare Part D initiative, RDS plans initially were very attractive to plan sponsors.  As part of President Obama’s push to help retirees continue to receive Rx benefits, the Retirement Drug Subsidy was established in 2004.  The plan was to provide partial payment from the CMS directly to plan sponsors to offset their cost of providing a pharmacy benefit after employment.  This saved companies millions of dollars.

At that time, RDS was very popular because it offered benefits for plan sponsors that did not exist before. These included:

  • A 28% tax-free subsidy paid directly to the plan sponsor for approved drug prescription plan costs between $295 and $6000 (for 2009)
  • A 100% write off of their Rx costs as expenses (the company’s 72% share and the 28% subsidy)
  • The costs associated with administering the plan were tax deductible

There were, however, several factors that also made RDS a burden to plan sponsors.  These mostly centered on lengthy and complicated administration costs with the requirement that their plan must also pass two actuarial equivalent tests.  In addition, there was no catastrophic coverage for plan enrollees, leaving the company to shoulder the burden.


With the passage of new healthcare regulations, the Patient Protection and Affordable Care Act, RDS plans under Medicare Part D employers who previously were able to take a tax deduction for the 28% subsidy will no longer be able to do so.  This changed the dynamics of the RDS vs EGWP debate. The change represents a substantial increase in costs that employers supplying OPEB’s to retirees must bear.  This new tax status went into effect on January 1, 2013.

As a result of this change, general accounting rules require that the present value of the taxes on the 28 percent subsidy are reflected as a current liability against earnings. This has caused an immediate adverse effect on the balance sheets of public and private companies. Companies such as AT&T saw a $1 billion dollar write-down, Verizon a $970 million dollar write-down and Boeing a $150 million write-down.  The impact was immediately felt.

Luckily, a provision in the Medicare Part D language has allows self-funded group plans (as opposed to individual plans) to realize benefits that offset this change in the tax rules.  This is where EGWP strategies can pay off.

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