Generac travels an uncommon path in funding benefits

Published Sept. 17, 2007

By JERRY GEISEL

WAUKESHA, Wis.--For more than two decades, Generac Power Systems Inc. has been using a popular tax-favored vehicle for the collection and disbursement of monies related to the administration of its self-funded health care benefits plan.

That vehicle is known as a voluntary employee beneficiary association. The arrangement offers several tax advantages: Contributions to the arrangements are tax-deductible, while investment income earned on those contributions is tax-free; and funds, such as for the payment of claims, can be withdrawn tax-free, but withdrawals are allowed only for benefit-related expenses.

"VEBAs offer tax advantages to the company, and ensure that money designated to operate the plan is appropriately allocated for only'' benefits, said Linda M. Kuklinski, Generac's manager of employee benefits and risk management in Waukesha, Wis.

The fact that a VEBA only can be used for funding and payment of benefits "creates accountability for the company to maintain finances to support the benefits plan, which in turn gives security to the employees' participating,'' she said.

While the VEBA helps Generac manage cash flow related to its health care plan, which it self-funds, Generac does have a financial backup: It purchases both specific and aggregate stop-loss insurance from Sun Life Assurance Co., which provides coverage if any individual claim exceeds a stipulated amount or if total claims exceed a certain level.

Ms. Kuklinski says that for most companies self-funding their health care plans, purchasing medical stop-loss coverage is a must due to the volatility of claims experience.

Generac, Ms. Kuklinski says, stays in touch with its stop-loss underwriter so it can "understand our philosophy and exactly what we are doing to aggressively mitigate claims costs, to keep our health care costs down and exposure limited.''

Even when a big health care claim can't be avoided, it always can be managed, she said.

On the retirement plan side, Generac is somewhat unusual for an employer of its size--about 1,500 employees--in offering both defined benefit and defined contribution plans. Many, if not most employers of that size, now offer only defined contribution plans.

According to Ms. Kuklinski, the company has continued to offer defined benefit plans--one plan covers salaried employees and the other covers hourly employees--as an incentive to encourage long service.

Still, the company continues to evaluate whether defined benefit plans are "the best investment'' in providing retirement benefits, Ms. Kuklinski said.

And with congressional passage last year of a complex pension reform measure that, among other things, stiffened funding rules and increased the volatility of required contributions, Generac is "spending even more time'' evaluating whether defined benefit plans continue to be a good investment in providing retirement savings benefits, she said.