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Retiree Drug Subsidy

The Retiree Drug Subsidy (RDS) program was created by the Medicare Prescription Drug, Improvement, and Modernization Act (MMA).  The aim of the program was to encourage employers to continue providing high quality prescription drug benefits to retirees rather than shifting the employees to Medicare Part D.

In order to achieve the goal of encouraging employers to continue covering their retirees, the MMA provided a tax-deductible subsidy equal to 28% of covered prescription drug costs for retirees. Starting with the 2013 tax year, the Affordable Care Act eliminated the ability of employers to claim tax deductions for retiree prescription drug costs that are reimbursed by RDS. However, RDS payments may continue to be excluded from the employer’s taxable income.