VEBA trusts help higher education institutions keep retiree health benefits affordable

A pioneering program launched in 2005 has enabled about 50 colleges and universities to offer retiree health care coverage that avoids the extremes of coverage that becomes unaffordable over time and providing no coverage at all.

The New Windsor, N.Y.-based Emeriti Retirement Health Solutions program broke new ground in the retiree health care plan funding arena when it was launched in 2005. And it continues as a model for meeting the needs of academic institutions and their employees.

“It has the appeal of being both predictable in cost and being a reliable source of coverage from employees' perspective,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York and an Emeriti adviser.

Under the program, each school makes contributions to tax-exempt trusts known as voluntary employees' beneficiary associations. Each school decides its contribution based on the level of financial support it wants to provide. The minimum contribution is 0.5% of payroll of the group of employees eligible to receive an employer contribution.

Employees also contribute aftertax dollars to separate VEBAs. Employees direct VEBA contributions into a set of mutual funds, including a money market fund and life cycle funds, offered by financial services firm TIAA-CREF of New York.

The contributions and the investment income earn tax-free interest. When employees retire and are eligible for Medicare, they can withdraw funds tax-free to pay premiums for one of several health care plans offered by Aetna Inc. In Minnesota, coverage is offered by HealthPartners, a nonprofit health maintenance organization.

Retirees also can take out funds to pay for other uncovered health care expenses, such as claims subject to a deductible as well as Medicare Part B and Part D premiums. Employees who meet their academic institution's retirement eligibility requirements but retire before they are Medicare-eligible can withdraw funds tax-free to pay health care-related expenses.

Executives at academic institutions say the program is a good middle approach between two extremes. At one end are traditional defined benefit-type retiree health care plans whose costs are difficult to project and have become very expensive. At the other end is no coverage at all, which can result employees staying at their jobs past age 65, limiting openings available to new academic talent.

With a traditional plan, “You have a huge accrual of liabilities. This is a reasonable way of providing coverage without amassing the liabilities,” said Don Mortenson, senior vp-business and planning at Seattle Pacific University in Seattle. Seattle Pacific contributes an amount equal to just over 1% of employees' gross salary for employees ages 35 to 60.

“We thought this was a good benefit to provide,” said Robin Aspinall, treasurer and vp of business and administration and treasurer at Claremont McKenna College in Claremont, Calif. The coverage aids in recruitment and provides an incentive—not a deterrent—to retirement, Ms. Aspinall said. Claremont contributes 0.5% of salary for employees, starting at age 40.

“We know exactly what our costs are, while this makes it easier for people to retire when they need to. This fills a noticeable gap in our benefits program,” said G. Richard Wynn, treasurer and vp of finance and administration at Haverford College in Haverford, Pa. Haverford contributes about $1,000 a year for eligible employees.

While employer sponsorship of retiree health care plans has dramatically declined over the past two decades due to corporate concerns about the costs of those programs, the Emeriti program bucks that trend. Of current participants, about 40% didn't previously offer retiree health care coverage, said Barbara Perry, Emeriti's vp for marketing and membership in New Windsor, N.Y.

The program also is available to a wide variety of other nonprofit institutions: elementary and secondary schools, teaching hospitals, medical research organizations, libraries and museums, certain educational associations and certain charitable foundations, such as those that direct a substantial part of their philanthropic efforts toward colleges and universities.

While none has yet joined, there has been “keen interest” in the program from several nonacademic organizations, Ms. Perry said.