AT&T said Friday that it is preparing for President Obama's health care overhaul to cost the telecommunications giant an additional $1 billion in expenses in the first quarter, possibly forcing the company to cut benefits it offers to current and retired workers.
AT&T is the latest and biggest company to account for the financial impact that the health care overhaul will have on its bottom line. It said the tax ramifications related to the legislation that Obama signed Tuesday will force it to take a non-cash charge -- an expense that does not require cash to be paid out but has to be charged against the company's earnings.
Earlier this week, AK Steel Corp., Caterpillar, Deere and Valero Energy announced similar accounting charges, saying the health care law will raise their expenses. On Friday, 3M said it will also take a charge of $85 million to $90 million.
But AT&T's charge is the largest disclosed so far. The other five's combined charges are less than half of the $1 billion that AT&T is planning. And the $1 billion is a third of AT&T's most recent quarterly profit. In the fourth quarter of 2009, the company earned $3 billion on revenue of $30.9 billion.
The sweeping health care legislation that Obama signed into law Tuesday requires companies of a certain size to provide health care coverage to their workers in an effort to expand insurance to some 32 million Americans.
Taxes on some companies are being raised to help defray the cost of the legislation.
AT&T said Friday that the charge reflects changes to how Medicare subsidies are taxed. Companies say the health care overhaul will require them to start paying taxes next year on a subsidy they receive for retiree drug coverage.
Business organizations, such as the U.S. Chamber of Commerce, have slammed the new law, arguing it will hurt companies by adding new costs and additional tax burdens.
Chamber spokesman Blair Latoff said Friday in an e-mail that altering the tax law "will have a negative impact" on companies' cash flows, particularly in the first year of the law's enactment.
Latoff added, "the government will quickly find out that by raising the costs for employers to provide retiree drug plans, they are incenting employers to drop these plans and send their employees to the Medicare program; in other words, the government will no longer pay a portion of their costs…it will pay all of their costs."
Karl Rove, a senior aide to former President Bush and a Fox News contributor, also predicted that more companies will drop their retiree drug plans and "put the entire cost on the federal taxpayer."
"There's no incentive any longer for them to continue to have a cordial relationship with their retirees by continuing to pay most of the cost of their drugs," he told Fox News.
An Obama administration official did not respond to a request for comment on AT&T's announcement but the White House in the past has suggested that companies are exaggerating the impact of the loss because they oppose the new law.
White House spokesman Robert Gibbs said Thursday that the tax law closed a loophole.
Under the 2003 Medicare prescription drug program, companies that provide prescription drug benefits for retirees have been able to receive subsidies covering 28 percent of eligible costs. But they could deduct the entire amount they spent on these drug benefits -- including the subsidies -- from their taxable income.
The new law allows companies to only deduct the 72 percent they spent.
The White House and Democratic leaders in Congress argue that under the old law, companies were in effect getting two deductions, not one, because they were able to deduct from the taxes they pay each year the amount of the subsidy the government was giving these companies to help them out.
AT&T also said Friday that it is looking into changing the health care benefits it offers because of the new law. Analysts say retirees could lose the prescription drug coverage provided by their former employers as a result of the overhaul.
Changes to benefits are unlikely to take effect immediately. Rather, the issue would most likely come up as part of contract negotiations between the company and unions representing its employees and retirees. AT&T is the largest private employer of union workers in the U.S.
Candice Johnson, spokeswoman for the Communications Workers of America, which represents more than 160,000 AT&T workers, said these employees have contracts in place until 2012. An agreement covering retirees also runs through 2012.
AT&T rival Verizon Communications Inc. was among 10 companies that sent a letter to congressional leaders in December warning that their costs would increase with the health care changes. Verizon spokesman Peter Thonis said the company had no comment.
Fox Business' Dunstan Prial, Fox News' James Rosen and The Associated Press contributed to this repot.