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Jerry Geisel

Special trusts help employers shed retiree health care liabilities

VEBAs allow employers to fund programs upfront, create shield against future cost increases

May 25, 2014 - 6:00am

Voluntary Beneficiary Associations


Special trusts called voluntary employees' beneficiary associations, long used to fund long-term disability and other employee benefits, have become a way for financially troubled employers to shed their retiree health care liabilities.

VEBAs also are being used by financially healthy organizations. For example, more than 50 colleges and universities have banded together to fund their retiree health care programs (see related story).

And in a one-of-a-kind approach, The Coca-Cola Co. has proposed using a VEBA as part of a complex arrangement to fund retiree health care using its South Carolina-domiciled captive insurer.

The U.S. Department of Labor approved the arrangement in 2010. And this month, the Internal Revenue Service, in a general revenue ruling, gave favorable tax treatment to the approach.

Coca-Cola said in a statement it is now studying the ruling “so that we can now move ahead.”

VEBAs, first authorized by a 1928 federal law, have been around for decades. But it has been only in recent years — because of the size of the newest trusts — that VEBAs have been in the spotlight.

“Until fairly recently, you haven't heard much about VEBAs,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

But that has changed.

“There have been some very large undertakings,” said Dave Ostendorf, a senior consultant with Towers Watson & Co. in Milwaukee.

“VEBAs are becoming an attractive retiree health care funding vehicle,” said Tom Tomczyk, a principal in the Pittsburgh office of Buck Consultants L.L.C.

Much of the recent VEBA activity has involved financially troubled employers that were liable for massive retiree health care obligations for union-represented employees and retirees.

The largest retiree health care VEBA transaction goes back to 2007, when the three Detroit automakers reached a VEBA deal with the United Auto Workers union in which Chrysler L.L.C., Ford Motor Co. and General Motors Co. agreed to contribute about $50 billion to a VEBA controlled by the UAW. With that, the automakers no longer have to provide health coverage to UAW-represented retirees, their families or future retirees.

Also in 2007, Goodyear Tire & Rubber Co. agreed to pump $1 billion into a VEBA, eliminating its obligation to provide retiree health care benefits as part of a deal struck with the United Steel Workers union.

The two are among the largest to date among the more than 1,000 VEBAs that have been formed (see chart).

What these and other VEBA retiree health care deals have in common are trade-offs for employers, employees and retirees.

For employers, the VEBA approach means relinquishing huge sums of money. For example, the UAW's contract required GM to pump $30 billion into the VEBA — money that could have been used for other corporate purposes. “You are talking about a very substantial cash commitment,” said Towers Watson's Mr. Ostendorf.

On the other hand, employers' VEBA contributions, which include assumptions about interest income over time, may be far less than the benefits' value. In GM's case, its $30 billion VEBA contribution was $20 billion less than the $50 billion value of the benefits.

Employers that use such approaches are free from the cost and administrative hassle in offering retiree health coverage to what can be huge numbers of retirees and their dependents. The auto industry VEBA, which provides coverage to 766,000 Chrysler, Ford and GM retirees and dependents, has 90 staffers, a UAW spokeswoman said. In 2012, the most recent information available, about $4.1 billion was paid for participants' health services, she said.

How long the money employers contribute to VEBAs will last is an unknown because of the lack of certainty on two key variables: investment returns and health care inflation rates.

On the other hand, the VEBA approach assures retirees “that some benefits will be provided where otherwise retirees might have ended up with none,” said Buck Consultants' Mr. Tomczyk.

From the retirees' perspective, “It is better to have something funded than not funded,” Mr. Ostendorf said.

“The money is secure and dedicated to retirees' benefits. That has helped to bolster the security of the benefits,” Mr. Thompson said.

More retiree health care VEBAs may be formed down the road.

Mr. Ostendorf said he believes interest could come from the public sector, which has amassed enormous, and largely unfunded, retiree health care obligations. In 2010 — the last year for which complete information is available — states had $627 billion in unfunded retiree health care obligations, according to a 2012 study by the Pew Center on the States, a nonprofit organization in Washington.

However, Congress' failure last year to extend a VEBA-related provision that was part of a 2009 law removed a tax break for special retiree health care VEBAs: those authorized by federal bankruptcy courts.

Under that provision, VEBA participants were eligible for a federal tax credit equal to 72.5% of the premiums they paid for coverage. That tax credit, though, expired at the end of 2013, and little momentum has developed in Congress to restore it.

 



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