NEW YORK—Thousands of pre-Medicare eligible retirees who once worked for steel companies that abandoned their pension plans will be able to get health care coverage starting on July 1 through an innovative arrangement that will use a special trust to tap federal premium subsidies.

U.S. Bankruptcy Court Judge Burton Lifland in New York approved the formation Tuesday of the Steel Retiree VEBA Trust.

Judge Lifland's order, in a case involving Bethlehem Steel Corp., which filed for bankruptcy a decade ago and whose assets were later liquidated, will make medical, prescription drug, dental and vision care coverage available to Bethlehem retirees and their dependents. Such coverage also will be available to retirees who worked at other financially distressed or failed steel companies headquartered or formerly headquartered in Pennsylvania, Ohio and Michigan, and whose pension plans were taken over by the Pension Benefit Guaranty Corp.

The coverage offered through the Steel Retiree VEBA Trust, a voluntary employees' beneficiary association and available to more than 45,000 retirees age 55 through 64 and their dependents, will be written by several insurers. Aetna Inc. will provide health and prescription drug coverage, Metropolitan Life Insurance Co., will offer dental coverage and vision care coverage will be offered by VSP Vision Care Inc. Cone Insurance Group in Houston served as a broker for the VEBA.

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Retirees and their dependents of well-known steel companies include LTV Corp., Acme Steel Co., Republic Steel Corp., Wheeling-Pittsburgh Steel Corp. and dozens of others, will be able to obtain coverage at a fraction of the cost—due to a little-known provision in a 2009 economic stimulus law that expanded eligibility for a federal health insurance premium subsidy.

That subsidy, the Health Coverage Tax Credit, is available to individuals who have lost their jobs due to foreign competition or to pre-Medicare eligible retirees whose pension plans have been taken over by the PBGC.

The subsidy can be used to offset the cost of health insurance programs, such as COBRA continuation coverage.

The 2009 American Recovery and Reinvestment Act provision expanded the situations in which the tax credit would be available to include those in which coverage would be offered through a VEBA whose formation was authorized by a bankruptcy court.

The 2009 law also temporarily boosted the amount of the tax credit to 80% from 65%. In early 2011, that hike in the tax credit expired with the credit falling back to 65%. But President Barack Obama last October signed into law a trade bill that increased the credit to 72.5% of the premium through 2013.

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“The shrinking of the domestic steel industry and the flight of industry jobs overseas has, unfortunately, left many thousands of Americans without work and often with serious health concerns,” Dean Gloster, a partner with Farella Braun + Martel L.L.P., a San Francisco law firm representing trustees of the steel industry VEBA, said in a statement.

The combination of the VEBA and the HCTC “provide critical subsidies for displaced and retired workers who are out of work but too young for Medicare eligibility,” Mr. Gloster said.

With the tax credit effectively paying the majority of the premium, the cost savings for affected retirees will be significant. For example, for a Gold Plan that has an annual maximum out of pocket limit of $2,500, the monthly premium, which also includes dental and vision care, for family coverage for retirees living in Bethlehem Pa., will be $2,318.16. With the 72.5% federal health coverage tax credit, the actual premium cost for retirees will be $637.49.

The program will offer tax credit-subsidized affordable health care coverage “to thousands of retirees living on smaller incomes than expected, who are in the age bracket that makes them otherwise difficult to insure,” Mr. Gloster said.

In addition, a similar VEBA-HCTC linked program that won bankruptcy court approval last year for retirees of auto parts companies with failed pension plans will also start issuing policies July 1.