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An Internal Revenue Service ruling expected this year could provide a groundbreaking way for employers to fund retiree health care benefits through their captive insurers and special tax-exempt trusts.
Three years ago, The Coca-Cola Co. launched its drive to fund retiree health care obligations when it sought Labor Department approval of the trailblazing funding arrangement.
In its Labor Department filing, the world’s largest nonalcoholic beverage company outlined the complex transaction.
Coca-Cola would use funds now held in a trust—known as a voluntary employees’ beneficiary association, to purchase medical stop-loss policies from Prudential Insurance Co. of America to pay claims over the expected lifetime of about 4,000 retirees and dependents.
Coca-Cola established the VEBA in 2006, contributing $216 million in assets.
The medical stop-loss coverage would pay claims that fall between an attachment point and an upper limit.
In its application, Coca-Cola said the attachment point for all retirees would be $100. For those younger than 65, the upper limit would be $5,800; for retirees 65 and older, the upper limit would be $3,500.
In turn, Prudential would use the premium it receives from Coca-Cola to reinsure the risk with Red Re Inc., Coca-Cola's South Carolina captive insurer, and one of three Coca-Cola captives. Atlanta-based Coca-Cola now utilizes Red Re for a wide range of risks, including reinsuring fronting insurers used to provide international employee benefit coverage.
Coca-Cola executives say there are several advantages to the program. Among other things, the arrangement would ensure the “consolidation of cash in the captive and centralized control of the assets,” said Laurie Solomon, Coca-Cola’s director of risk management.
By retaining control of the cash, Red Re and ultimately Coca-Cola would be the beneficiary of favorable investment results,” Ms. Solomon said.
By contrast, in a traditional VEBA arrangement, once money is contributed to the trust, it and any investment gains must be used for the exclusive benefit of plan participants.
First, though, the arrangement had to pass muster with the Labor Department, which has jurisdiction over captive benefit funding plans.
In 2010, the Labor Department approved the arrangement, the first time it authorized such a transaction. In 2004, Whirlpool Corp. withdrew a somewhat similar plan after the Labor Department rejected the appliance manufacturer’s request to have the proposal considered under a special expedited review process.
Now, Coca-Cola is waiting for an IRS ruling addressing certain tax aspects of the arrangement. Ms. Solomon says she is optimistic that the IRS will issue its ruling this year.
While no one knows how the IRS will rule, experts say if the ruling is favorable, other employers will follow in Coca-Cola’s footsteps.
“There is definitely interest among companies that want to use their captives creatively to gain more control of assets and better manage investment income,” Ms. Solomon said.
“There are more than a handful of companies who are interested,” said Mitchell Cole, a director in the Stamford, Conn., office of Towers Watson & Co., which is Coca-Cola’s consultant on the project.
“If this is OK’d, you will see more than a dozen employers do this. This is a very attractive structure,” said Kathleen Waslov, a senior vp and senior resource consultant in Boston with Willis Group Holdings P.L.C.
“I’ve always thought this type of arrangement made sense,” said Karin Landy, a managing partner with Spring Consulting Group in Boston.
“You needed a pioneer,” Ms. Waslov said, adding that many companies don’t want to be the first to try an approach.
Still, the arrangement is not for everyone, experts say, noting that many companies would not want to commit so much cash.
In addition, planning requires the cooperation of corporate risk management and human resource departments.
“You need a partnership of risk management and HR,” said George O’Donnell, a senior vp with Aon Hewitt in Somerset, N.J.