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VEBA used for retiree health benefits

VEBA used for retiree health benefits

AKRON, Ohio—Goodyear Tire & Rubber Co.'s top executives say a recently ratified collective bargaining agreement that calls for Goodyear to contribute $1 billion to a special tax-exempt trust to pay for retiree health care benefits is a win for the company and retirees.

Under the agreement reached with the United Steel Workers union, Akron, Ohio-based Goodyear will contribute $700 million in cash to a Voluntary Employees' Beneficiary Assn. with the $300 million balance in additional cash or Goodyear common stock at the company's option. The contribution is fully tax-deductible.

After Goodyear makes its contribution to the VEBA, which will be administered by USW appointed trustees, its responsibility and liability to provide retiree health care benefits to current and future retirees who were represented by the USW will end.

Correspondingly, retiree health care benefits no longer will be a subject of collective bargaining with the USW.

Through the arrangement, which still must be approved by a federal court, Goodyear says it will improve its cash flow by $145 million a year, while eliminating from its financial statements its $1.3 billion projected liability for USW retiree health care benefits.

Goodyear President and CEO Robert Keegan described the retiree health care funding arrangement as a "win-win" situation. In a webcast presentation last week, Mr. Keegan said the arrangement removes a big financial obligation, while protecting retiree health care benefits.

A spokesman for the USW, which represents more than 13,000 Goodyear employees, concurred that providing security for retiree health care benefits was vital. "It is important to protect current and future retirees," he said.

Outside experts say the arrangement likely will be closely examined by other employers that have amassed huge retiree health care obligations that were promised through collective bargaining agreements and can't be terminated at the employer's discretion.

Employer advantages

From an employer perspective, there are several advantages to transferring retiree health care benefits and then making a one-time contribution to the VEBA.

"They are putting their retiree medical liabilities behind them," said Russell Greenblatt, a partner with the law firm Katten Muchin Rosenman L.L.P. in Chicago. That, in turn, Mr. Greenblatt said, may make a company more attractive to creditors and investors.

Similarly, noted Derek Guyton, a principal with Mercer Health & Benefits in Chicago, the approach eliminates the volatility associated with retiree health care benefits where even a small increase in health care inflation can have a big impact on the size of a company's retiree health care obligations.

But, not every company can take such an approach. "You need access to cash," Mr. Greenblatt said.

Additionally, a company's union has to agree to the transfer. Given though, the well-reported loss of retiree health care benefits to thousands of airline retirees when their employers filed for bankruptcy, unions might be more receptive to such arrangements than before.

"Money is being set aside to fund benefits as opposed to an unfunded promise," Mr. Greenblatt said.

Also, VEBA assets are out of the reach of creditors, assuring they will be available to pay benefits regardless of what happens to the employer.