webinar vebas pre-funding retiree health benefits… and a lot more
TRANSCRIPT
Webinar
VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS…
And a lot more.
VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS
Whether you are a benefits manager, administrator charged with finding a solution to manage retiree medical liabilities or an investor analyzing a company with post-retirement benefits on the books, this webinar is a must attend event.
Hear from benefits expert, Lance Wallach, as he provides valuable guidance on the implications of VEBAs and the potential benefits they can offer. Topics of discussion will include:
An overview of the GM and Ford agreements
How they work: The proper formation and operation of a VEBA
Key considerations for plan design, administration and investments
Alternatives to VEBAs
Pros and cons for employers and special considerations for public-sector employers
Investor perspective: The potential impact of a VEBA on large, publicly traded companies
This is your opportunity to hear from and ask specific questions of the leading expert on VEBAs! Plus, Mr. Wallach has offered 10 minutes of free consultation to webinar participants within one week after the event!
Who Should Attend?From Private, Public Sector and Multi-Employer Entities including
Plan administrators
Plan Benefit Managers
HR personnel as well as:
Health Care Benefit Consultants
Compliance Officers
Attorneys
As well as analysts from Hedge Funds, Private Equity and Venture Capital companies investing in companies with or considering a VEBA
VEBAS PRE-FUNDING RETIREE HEALTH BENEFITS
Presented by:Lance Wallach, CLU, CHFC, CIMC
A member of the AICPA faculty of teaching professionals and an AICPA course developer, is a frequent and popular speaker on VEBAs, retirement plans, reducing health insurance costs, and captive insurance at accounting and benefits conventions. He has authored numerous books including Tax Planning and Asset Protection Using VEBAs Mr. Wallach writes for over fifty publications including AICPA Planner, Accounting
Today, CPA Journal, Enrolled Agents Journal, Financial Planning, Registered Representative, Tax Practitioners Journal, CPA/Law Forum, Employee Benefit News, Health Underwriter, Advisor and the American Medical Association News. Mr. Wallach is listed in Who's Who in Finance and Industry and is frequently quoted in the press for his expertise on VEBAs—including Bloomberg.com, Washington Post and USA Today. He has also been featured on television and radio financial talk shows including NPR.
Accounting Today: Reduce Other Post-Employment Benefits Liability with a VEBABy Lance Wallach June 16, 2008
In 1994, the Government Accounting Standards Board (GASB) established standards for public employee pension plans. Government and public employers have to report and account for pension benefits costs.
However, until recent years, there was no such standard in place for other post-employment benefits (OPEBs) for state and local government workers.
Private sector employers have been required to report OPEBs for over 15 years under the FASB Standards106/158.
Government and public sector employers have been required to report OPEBs since August 2004 after the issuance of GASB Statement 45. This means that all government employers must now keep their promise of providing retiree benefits. They need to be calculated accurately, accrued during the employee’s years of work with the employer, and recognized as a financial obligation as OPEB costs. These costs are to be reported on financial statements of large public sector employers beginning with the first financial report period after December 15, 2006, and on small employers beginning in 2008.
The intent of GASB 45 was to bring government and public accounting standards into line with private company standards. This requires reporting pensions as well as non-pension post-employment benefits. As the name states, OPEBs are benefits other than pensions. Many state and local governments, public schools, public universities and other public and government agencies provide post-employment benefits that are non-pension-related. These benefits can include health care benefits including vision, dental, prescription and health insurance; life insurance; legal benefits and other non-pension-related work benefits.
Until these changes were put in place with GASB 45 and enforced, readers of government and public financial statements had incomplete information on the costs of services provided by state and local governments and public employers, and were therefore unable to analyze the financial position and long-term health of these government and public agencies.
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Accounting Today: Reduce Other Post-Employment Benefits Liability with a VEBABy Lance Wallach June 16, 2008
Actuarial calculations are used to derive the OPEB cost. In order to keep the calculations up to date, they must be recalculated every two to three years depending on the size of the employer. For example, employers with less than 100 employees can use a simplified alternative method for measuring the OPEB cost, but these employers still need to re-evaluate and re-assess every three years. The costs and obligations for post-employment benefits are determined using the actuarial present value of the post-employment benefits - in other words, the present value on term of service and the terms of the OPEB plan that are presently in place.
There are assumptions that are made in the actuarial evaluations. They include:
There are assumptions that are made in the actuarial evaluations. They include:
· Healthcare cost factors: age, industry, family, geography, gender.
· Expected long-term and/or short term rate of return on plan assets.
· Projected salary scale.
· Death rates.
· Projected inflation of medical care costs.
· Employee turnover rate.
· Retirement rates; this can vary extensively from year to year.
· Any promises made to retirees.
· Discounts or benefits designed into the plan.
Accounting Today: Reduce Other Post-Employment Benefits Liability with a VEBABy Lance Wallach
After the actuarial evaluations are completed, each employee gains a different attribution period, which is based on their period of eligibility – date of hire to date of full eligibility (i.e. retirement). With all this said, GASB only requires that employers report OPEBs; employers are not required or even obligated to fund the OPEB cost. However, not doing so can affect significantly an employer’s credit rating and cost of issuing debt financing.
The largest OPEB cost for an employer is health care benefits. The majority of public sector employers, with more than 200 employees, offer some form of post-employment health benefits. Unfortunately, with the uncontrollable increases in health care costs happening annually, and severe budget cuts being put in place across nearly all public and government agencies, the continuing use of “pay-as-you-go” will become more difficult and create new financial liabilities for employers. Add to this state laws that require employers to allow retirees to remain on the active health plan until Medicare steps in, and the reduction in federal and state subsidies, and employers are struggling to subsidize the gap between the blended plan cost (active employees and retirees) and the actual retiree cost. Even if the employer is not contributing to the retiree health care plan, this amount adds additional liability.
In December 2004, a report from Standard and Poor’s, stated that: “The new [GASB 45] reporting may reveal cases in which the actuarial funding of post-employment health benefits would seriously strain operations, or, further, may uncover conditions under which employers are unable or unwilling to fulfill these obligations. In such cases, these liabilities may adversely affect the employer's creditworthiness. All Standard & Poor's rated employers will be monitored closely in terms of their reporting under GASB 45. Upon implementation of these new standards, we will include the new information as part of our ongoing analytical surveillance of ratings."
The following year, in June 2005, Fitch Ratings released its report, saying: “Fitch's credit focus will be on understanding each issuer's [GASB 45] liability and its plans for addressing it. Fitch also will review an entity's reasoning for developing its plan. An absence of action taken to fund OPEB liabilities or otherwise manage them will be viewed as a negative rating factor. Steady progress toward reaching the actuarially determined annual contribution level will be critical to sound credit quality."
Everyone is working towards a solution that will benefit both employers and employees. But it takes constant monitoring by both employers and employees.
Accounting Today: Reduce Other Post-Employment Benefits Liability with a VEBABy Lance Wallach
One solution that could benefit everyone is considering a VEBA plan.
VEBAs have been successfully established to help reduce health costs and establish financially sound OPEB plans that have proven to be both efficient and effective. The VEBA can help employers develop strategies that can lower their liabilities. Many private sector employers have benefited from the introduction and use of a VEBA for their OPEB plan.
A well designed GASB 45 OPEB involves many different risk management strategies and funding techniques. Any benefit promise made by an employer should be partially or fully funded in a qualified trust to enable actuaries the use of long-term discount rates during the calculations. One approach to this funding source could be issuing OPEB obligation bonds or finance pools. The employer can then successfully take these finance strategies and blend a defined-benefit approach with a defined-contribution strategy to create a successfully managed OPEB plan with reduced liabilities.
These two basic forms of post-employment benefit plans specify either the amount of benefits to be provided to an employee at the end of their employment period, or stipulate only the amount to be contributed by the employer to a member’s account for each year of active employment.
A defined-benefit OPEB plan is where the terms are specified and the benefits provided from the time of retirement or other employment separation. These benefits can be dollar-specific or the type/level of coverage - for example, a dollar payment based on a flat rate or years of service, or defined medical coverage, prescription drugs or a percentage of the premiums. Unfortunately, the defined benefit OPEB plan is complicated where the reporting makes assumptions on future medical costs, mortality rates, the availability of Medicare, and the probability of future events.
Accounting Today: Reduce Other Post-Employment Benefits Liability with a VEBABy Lance Wallach
A defined-contribution OPEB plan considers the individual. It takes into account individual contributions while active, rather than the benefits the beneficiaries are to receive post-employment. Benefits for the defined-contribution plan consist of contributions, earnings on investments of these contributions, and forfeitures on the member’s account. This makes the plan easier to report on, but does not specify the amount of benefits received by the employee after retirement.
GASB accrual standards only apply to defined-benefit OPEB plans. Defined contributions are considered “funded,” as the employer cost equals the required contribution. Therefore, changing the way retiree healthcare and other post-employment benefits are paid can lower or even eliminate the unfunded other post-employment benefits liability.
Now that the public sector and government agencies have to report other post-employment benefits, the VEBA can establish the best plan for the least liability for employers. State and local governments and public services can look at the private sector and see the benefits it has gained from using VEBAs. They can see how it can help soften the financial impact of the new, significant reporting obligation.
Lance Wallach is a frequent speaker at national conventions and writes for more than 50 publications. He was the National Society of Accountants Speaker of the Year. Lance welcomes your contact. Email - [email protected] or call 516-938-5007 for more info.
DISCLAIMER: The information provided herein is not intended as legal, accounting, financial, or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Why VEBAs in the PS market?
How does GASB relate to costs?
What 'vehicles' can employers use?
How does a VEBA work for pre-funding retiree health?
Reference Material / Articles of Interest
“VEBA” – the “Buzz” Word in Employee Benefits
Voluntary employees’ beneficiary associations (VEBAs) are being used to manage retiree medical liabilities
Key factors:
Financial commitment by an employer +
Acceptance of responsibility by the union/retirees
Employer pays:
Fixed payments
Active wage deferrals
Other
Retirees pay:
Retiree contributions
Coinsurance and deductibles
Plan changes, which are determined by the trustees
Plan trustees will include representatives of the retirees
Why VEBAs in the Public Sector Market?
Private employers are limited in their retiree health funding options
Implications of pulling too much revenue away from taxable income
Cafeteria plan rules for employee funding
Drain on available cash for other profit-making investments
Public employers do not have the tax limitations of private employers
GASB liability reporting is triggering a fresh look at how to fund or pre-fund retiree health benefits
Advantage of public sector trusts:
No limits on amount that can be funded
Because a government entity is not subject to income tax
Polling Question
What type of jurisdiction do you represent?
State
County, City or Town
School district
Transit group
Federal employer
Other jurisdiction/instrumentality
Non-profit organization
Insurance company
Administrative service provider
Other
Why VEBAs in the PS market?
How does GASB relate to costs?
What 'vehicles' can employers use?
How does a VEBA work for pre-funding retiree health?
Reference Material / Articles of interest
How Does GASB Relate to Costs?
The Governmental Accounting Standards Board (GASB) statements of accounting principles for:
• Statement 45 for Employers
• Statement 43 for Plan Disclosure
Requires Disclosure—NOT FundingRequires Disclosure—NOT Funding
What is OPEB?
Other Post Employment Benefits (OPEB)
Medical benefits
Dental
Vision
Prescription drugs
Life insurance
Legal services
OPEB Reporting is phased in bysize of employer
GASB Has Taken Hold
As of November 2007, Standard & Poor’s Ratings Services reported:40 states have completed an actuarial valuation
OPEB liabilities are nearly $400 billion
Employers are considering the following actions:Move from pay-as-you-go to prefunding a trust to get a
more advantageous discount rate
Review legal basis for establishing trusts and issuing bonds
Use a carefully managed and forecasted pay-as-you-go funding plan
Adjust employee contribution levels
Reduce benefits
Create different benefit tiers for new employees
Contain health care costs in current plans
What Have Public Employers Learned?
NOTE: Collected from state reports, press articles, and Credit Suisse, “You Dropped a Bomb on Me, GASB” March 2007.
WHAT HAVE STATES LEARNED?
Maryland $14 billion
OPEB liability $2 billion annual prefunding contribution
compared to annual pay-go of $311 million
California $48 billion
OPEB liability $3.6 billion annual prefunding contribution
compared to annual pay-go of $1.2 billion
New Jersey $20 billion
OPEB liability $5 billion prefunding contribution compared to
annual pay-go of $1.2 billion
26 States $300+ billion
OPEB liability $35.6 billion annual prefunding contribution
compared to annual pay-go of $8.3 billion
Experience already shows moving from pay-go to pre-funding increases annual costs 6 – 10 times.
Experience already shows moving from pay-go to pre-funding increases annual costs 6 – 10 times.
Polling Question
What has your jurisdiction already done regarding GASB OPEB liabilities?
Nothing but discussion
Initial actuarial valuation
Valuations and plan changes
Valuations and contribution/eligibility changes
Benefit curtailment
Not applicable
OPEB Requirements for Plan Assets
To use accumulated plan assets to offset OPEB liabilities, plan assets must be:
Transferred to an irrevocable trust or equivalent arrangement
Dedicated to providing benefits to retirees and their beneficiaries under the terms of the plan
Legally protected from creditors of the employer and plan administrator
Advantage of funding:
Higher discount rate, which will result in a lower Annual Required Contribution (ARC)
Liabilities/ARC
Assets
Why VEBAs in the PS market?
How does GASB relate to costs?
What 'vehicles' can employers use?
How does a VEBA work for pre-funding retiree health?
Reference Material / Articles of interest
The Ideal Trust Structure
Employer and employee contributions tax exempt
Federal and state income tax
FICA
Permit employee after-tax or pre-tax contributions
Trust investment earnings tax exempt
Benefit payments tax exempt
GASB OPEB qualified asset
Plan assets protected by exclusive benefit trust
The Bad News?
No single vehicle existsto fill all these criteria.
The Good News: There are Some Attractive Possibilities
Potential Vehicles:
501(c)(9) VEBA
115 or Integral Governmental Trust
401(h) Medical Account
What to think about
The Government Finance Officers Association (GFOA) recommends that if a government elects to establish a trust fund, it should consider the following:
Legal environment
Impact on ARC
Leveraging costs and investing expertise
Trust vehicles and pros and cons
Administrative and reporting requirements
Governance structure
Satisfying GASB irrevocable trust requirements, but still being flexible
Pre-funding: Establishing a Trust
Source of Funding
Contributions
Bond Proceeds
Accrued sick and vacation leave
Level of Prefunding
Must determine level of prefunding
Proportion of benefits prefunded will dictate discount rate, a key factor in determining the size of the obligation
Assess scenarios to model the impact on funding and liabilities
Irrevocable or Not?
If trust is not irrevocable, cannot count assets as OPEB assets in the financial statement
Full disclosure and a plan to manage the cost is what rating agencies want to assign rating risk
Why VEBAs in the PS market?
How does GASB relate to costs?
What 'vehicles' can employers use?
How does a VEBA work for pre-funding retiree health?
Reference Material / Articles of Interest
VEBAs—A Quick Primer
Voluntary Employees’ Beneficiary Associations (VEBAs) are tax-favored trusts authorized under IRC § 501(c)(9) that allow employers to make tax-deductible contributions to a trust to fund health and welfare benefits
A VEBA trust is typically coupled with a group health plan
VEBAs are used for the following types of arrangements:
Single employer collectively-bargained trusts
Taft-Hartley trusts
Retiree committee trusts
Governmental plan retiree trusts
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VEBA Requirements—Tax Treatment
Employee contributions to a VEBA are allowed, but must be on an after-tax basis.
Employee contributions to a VEBA are allowed, but must be on an after-tax basis.
Benefits—Medical coverage provided under a VEBA, and medical benefits paid or reimbursed by a VEBA, are excluded from retirees’ incomes
Deductions—Employer contributions to a VEBA are deductible when contributed, subject to IRC 419/419A limitations (but note that these limits don’t apply to governmental VEBAs)
Income—Investment income of a VEBA on reserves held for retiree medical benefits may be subject to unrelated business income tax (but note that UBIT doesn’t apply to governmental VEBAs)
VEBA Requirements – General Structure
A VEBA must meet the following requirements:
Must be an employee association
Membership in the association must be voluntary
Must be used to provide life, sickness, accident, or other permissible benefits to its members and dependents (no deferred compensation)
No part of the net earnings of a VEBA may inure to the benefit of an employer, private shareholder, or individual
No reversion to contributing employer
VEBA Requirements – Permissible Benefits
Provides life, sickness, accident or other similar benefits
Benefits may include health, disability, life, AD&D, vacation, supplemental unemployment benefits, severance, education, child care facilities, legal services, disaster relief loans
Retiree Health Reimbursement Arrangements
Cannot include commuting expenses, accident or property insurance, loans, pensions, annuity, profit sharing or any other deferred compensation benefits or malpractice insurance
Certain de minimis benefits are permitted
VEBA Requirements—Membership
Organization must be formed on behalf of employees who associate together to receive the benefits provided by the organization
Employees must share an employment-related common bond
VEBA meets employee organization standard if 90% of membership are employees, former employees, etc. and their dependents
VEBA Requirements—Nondiscrimination Rules
VEBAs cannot discriminate, either in eligibility or in benefits, in favor of officers, shareholders, or highly compensated employees of an employer contributing to or otherwise funding the association
But these nondiscrimination rules do not apply if the employees/retirees are collectively-bargained
Special rules apply for contributions for “key” employees
VEBA Requirements—Documentation
Trust agreement
Plan of benefits
Contracts with service providers For example, claims administrators, insurance
carriers, investment managers, enrollment administrators, pharmacy benefit managers, subrogation, wellness, COBRA services, actuaries, auditors, lawyers
VEBA Requirements—Governance
VEBA must be controlled by the employee membership, an independent trustee(s) or trustees or other fiduciaries at least some of whom are designated on behalf of the employee members
Appointment of VEBA trustees varies depending on the type of trust
VEBA Requirements—Government Filings
VEBAs must apply to the IRS for a determination letter on Form 1024 to obtain recognition of tax-exempt status
Generally, VEBAs must file an annual information return on Form 990
Governmental units and their affiliates do not have to file the Form 990
VEBAs should appeal to employers
Collectively Bargained Workforce
Wants flexibility to allow after-tax employee contributions
Wants to be able to contribute pre-tax mandatory employee contributions
Does not have statutory authority to contribute to a 115 trust that meets GASB OPEB trust rules
Integral IRC Section 115 Trusts
Section 115(1) of the IRC provides that gross income does not include income derived from the exercise of any essential government function which accrues to a state or political subdivision
The establishment of a trust to provide medical benefits to retired employees and their dependents is an essential governmental function
Employer contributions to the trust are not taxable to retirees
Medical benefits or insurance received by retirees from the trust will not be taxable
Private letter ruling may be necessary
Section 115 Requirements—Tax Treatment
Employee contributions to a Section 115 trust are not permitted.Employee contributions to a Section 115 trust are not permitted.
Benefits—Medical coverage provided under a Section 115 trust, and medical benefits paid or reimbursed by the trust, are excluded from retirees’ incomes
Deductions—Employer contributions to a Section 115 trust are deductible when contributed, without limitation
Income—Investment income of a Section 115 trust on reserves held for retiree medical benefits is not subject to unrelated business income tax
Section 115 Trusts
Governmental entities may jointly form trusts to minimize legal and administrative costs
Several states have passed new laws that authorize the creation of trust funds in order to accumulate assets for OPEB
State-only solution v. all governmental agencies
401(h) Accounts
A 401(h) Account is a separate Retiree Medical Account within a Defined Benefit Pension Plan
Can pay benefits for retirees and their dependents
Funding must be subordinate to funding the retirement plan obligations
Overfunding can be transferred to the 401(h) account
Contributions for medical benefits cannot exceed 25% of the total contributions to the plan
Funds must be able to revert to the employer
401(h) Account Issues
Pre-tax employer contributions
Pre-tax employee contributions permitted through a mandatory “pickup” arrangement in which all eligible employees must participate
Possible employee dissatisfaction stemming from mandatory and irrevocable “pickup” arrangement
Additional administration required: separate funding and accounting for pension and medical benefits
Sponsors of well-funded pension plans may not be able to make contributions because of funding limit
VEBA 501(c)(9) Trust Pros and Cons
Advantages Disadvantages
Medical benefits are provided tax-free to retiree (beneficiary)
Investment earnings are tax-exempt
No contribution or benefit limitations
Flexibility
Permits only after-tax employee contributions, no pre-tax employee contributions
Requires IRS approval
Nondiscrimination rules (not applicable to collectively bargained plans)
115 Trust Pros and Cons
Advantages Disadvantages
Medical benefits are provided tax-free to retiree (beneficiary)
Investment earnings are tax-exempt
No formal IRS filing
No contribution or benefit limitations
Exclusive benefit rule
Flexibility
Unclear whether retiree pre-tax contributions are allowed
Unclear whether employee can contribute prospective leave accruals
Varying state laws for establishment and governance of trusts
No formal guidance from IRS yet
Nondiscrimination rules (not applicable to collectively bargained plans)
401(h) Pros and Cons
Advantages Disadvantages
Medical benefits are provided tax-free to retiree (beneficiary)
Investment earnings are tax-exempt
No vesting required
Mandatory employee contributions can be pre-tax
No nondiscrimination testing
Mandatory employee contributions and irrevocable “pick-up” arrangement
Contributions must be incidental to retirement benefit Annual 401(h) contributions cannot
exceed 25% of total aggregate contributions
Must be part of a 401(a) defined benefit or money purchase plan
Additional administration required for retirement system
Operational Considerations—Plan Design
Plan Sponsors will need to determine
eligibility rules
type of benefit plan
contributions
Operational Considerations – Plan Design: Five Medicare Part D Strategies
1.Obtain the 28% federal subsidy to Plan Sponsors for providing Rx coverage equivalent to Part D
2.Qualify your plan as its own PDP (>50% Federal subsidy)
3.Contract with a PDP on a group basis
4.Keep the current Rx program
5.Cease covering prescription drugs and shift subsidy to other retiree benefits
Consider the PROS and CONS of each strategy!Consider the PROS and CONS of each strategy!
Operational Considerations—Plan Administration
Determine which plan administrative processes will be handled by trustees and staff and/or delegated to vendors
Develop vendor procurement process
Determine performance standards for vendors
Issue RFPs, obtain bids and interview vendors
Select vendors and negotiate vendor contracts
Evaluate vendor performance
Operational Considerations—Plan Investments
Determine whether plan investment strategy will be handled by trustees and/or delegated to investment managers
Develop investment manager selection process
Determine goals for investment managers
Issue RFPs, obtain bids and interview investment managers
Select investment managers and negotiate contracts
Evaluate performance of investment managers
Operational Considerations—Professional Advisors
Identify, interview and select professional advisors to assist with complex tasks
Actuarial services
Auditors
Attorneys
Evaluate performance of professional advisors
Pension Protection Act—Public Safety Retirees
“Public safety officers” may direct up to $3,000 of annual retirement benefits to be paid tax-free for health insurance or long-term care insurance, effective 1/1/07
Applies to §401(a), §403(b) and §457 plans
Available only if disability or normal retirement age at separation from service
Direct payment only, reimbursement to retiree not permitted
Health insurance may cover retiree, plus spouse and dependents
Payments may be made for insured or self-insured coverage
Numerous administrative issues (e.g., definition of NRA, election after termination, coordination with plans and insurers, tax reporting, survivor benefits)
Why VEBAs in the PS market?
How does GASB relate to costs?
What 'vehicles' can employers use?
How does a VEBA work for pre-funding retiree health?
Reference Material/Articles of interest
Disclosure Requirements—Terminology
Actuarial Accrued Liability (AAL)
The AAL is the portion of the actuarial present value of total projected benefits allocated to years of employment prior to the measurement date
Normal Cost
The Normal Cost is the portion of the actuarial present value of total projected benefits allocated to the year following the measurement date
Annual Required Contribution (ARC)
The ARC is equal to the normal cost and the amortization of the unfunded accrued liability. There is no requirement that the ARC is funded
Net OPEB Obligation (NOO)
The NOO is the cumulative difference between the ARC and the actual contributions made (if any). At transition the NOO may be set at zero
Implicit Rate Subsidy
An implicit rate subsidy is the spread between the actual cost of retiree health care premiums and those of active participants when a government insures both in a single group at a blended rate
Obscure Health-Benefit Scheme Is Central Issue in Auto TalksThe Washington post September 9, 2007
“We heard at the end of our careers that we were not going to get what was promised all the years we were coming into work everyday,” said Larry Solomon, former president of UAW Local 751 in Decatur, Ill. “We felt betrayed.”
The form of funding is also important. A VEBA funded with cash is less risky than one funded with stock in a shaky company.
Because VEBAs are so complicated, vigorously educating employees on how they work is key to their success, said Lance Wallach, a VEBA consultant. “A few years ago, a lot of the casinos in Atlantic City started calling me about setting up a VEBA for them,” he said. “I told them it wouldn’t work because a lot of the workforce were not English-speaking. Part of making this work should be communicating to workers.”
Some of the more successful VEBAs, analysts say, are run by states and municipalities, which can raise taxes if their VEBAs run low on money. Government entities in California, Idaho, Indiana, Montana, Oregon and Washington have created VEBAs, and many more expect to do so in the next few years because the Government Accounting Standards Board recently began requiring disclosure of post-employment benefit obligations. ……..
Talks Continue Between GM and UAW By Jacqueline Fell Posted: Sunday, September 16, 2007 at 9:45 a.m.
The call hasn’t come telling union workers at General Motors to walk off the job. But there still isn't a new contract between the United Auto Workers and General Motors. Some say the fact that no one is talking, could be a good sign.
General Motors and the United Auto Workers restarted negotiations Saturday morning around 11. The night before, the parties were at the table until 4:30 in the morning.
Union members were on stand-by Thursday night putting picket signs together and waiting to see if a possible strike would come when the contract expired at midnight.
Someone close to the negotiations say a deal is not expected to be reached Saturday. At the core of the talks between GM and the UAW is high health care costs.
That’s where VEBA comes in. It's an innovative way to pay for healthcare. It's a trust that would be funded by the auto company but used by union workers. But members NBC 25 News spoke to this past week, say they know nothing about it. NBC 25 talked to an expert on a voluntary employee’s beneficiary association - or VEBA.
Lance Wallach, specializes in these plans, and says this type of fund could save General Motors and bring stability to the UAW.
GM is the strongest of the Big Three U.S. Automakers… but it also has one of the highest expenses - healthcare costs for retired and active employees. Last year GM spent $4.8 billon on healthcare. It's a liability, some analysts say, could shut GM down for good.
"You don't want General Motors to go out of business...this probably is the only solution," says Lance Wallach.
Wallach says a voluntary employee beneficiary association could be the saving grace for the automaker. But is it the best for the UAW?
"The plusses for the UAW are that they know the money will be available whether General Motors stays in business of goes out of business," says Wallach. "Through this VEBA they're going to get a lot less than they would normally get from the obligation General Motors currently has to the workers.”"
In Wallach's opinion, if the two don't come to an agreement on a VEBA plan, both could lose out.
"If they don't take this they're putting General Motors out of business."
Lance Wallach is a frequent speaker on VEBAs, pensions, and tax-oriented strategies at accounting, legal and medical conventions throughout the United States. He speaks at more than 70 conventions a year about VEBAs; he can be reached at 516/938-5007.
AT&T, Verizon May Follow GM, Let Unions Take on Retiree CostsBy Jeff Green and John LippertOct. 15, 2007 (Bloomberg) – AT&T
Oct. 15, 2007 (Bloomberg) – AT&T Inc., the biggest U.S. phone company, and No. 2 Verizon Communications Inc. may follow General Motors Corp. in trying to shift retiree health-care liabilities to a union-run fund, a move that has helped boost GM’s shares 39 percent this year.
The largest U.S. automaker reached a landmark agreement with the United Auto Workers last month to transfer $50 billion in such obligations to a Voluntary Employee Beneficiary Association, or VEBA. The telecommunications companies, which will both negotiate new contracts with their unions in the next two years, reported a combined $71 billion in retiree liabilities last year.
“We’ll be watching” how the GM union-run fund develops, said Alberto Canal, a spokeman for New York-based Verizon. He declined to give additional details. Verizon spends $3.5 billion a year for health-care coverage for 900,000 active workers, retirees and dependents, he said.
Verizon and AT&T both have a union that may set a precedent for so-called VEBAs in separate talks with GM that started last week. The Communications Workers of America’s industrial unit is considering a union-run fund for a GM plant it represents in Ohio. Michael Coe, a spokesman for San Antonio-based AT&T, declined to comment.
“Telecommunications are the next big group that will be looking at VEBAs,” said Howard Silverblatt, an analyst at Standard & Poor’s in New York. The ratings service estimates companies in the S&P 500 had $387 billion in retiree health-care and insurance commitments at the end of last year.
Sparked in 2005
Interest in retiree health-care trusts has been rising since 2005, when GM set up a $3 billion fund that it controlled with the United Auto Workers as part of a plan to require union retirees to pay health-care premiums fort the first time, said Lance Wallach, who runs VEBA Plan LLC, a consulting company in Plainview, New York.
About a third of Wallach’s business is talking to private-equity investors and venture capitalists about the risks of retiree health-care liabilities and the potential for unlocking their value from companies’ balance sheets, he said. “These are venture-capital guys looking for an edge.”
GM Allowed to take up to $6B out of fund By Sharon Silke Carty
USA TODAY
Motors' soaring health care costs have created a tempting pool of money the automaker is considering dipping into.
The hitch: That money is squirreled away in a fund designed to ensure that retirees will have their health care paid for by the automaker.
While discussing first-quarter results Tuesday, GM Chief Financial Officer John Devine said the company is considering tapping into the $20 billion Voluntary Employee's Beneficiary Association fund. The company is entitled to draw out cash equal to what it spent last year on health care and what it has spent so far this year.
That means GM could take $6 billion from the fund, Devine said, because its health care costs have been rising. For the first quarter alone, the company could account for $700 million in health care expenses. Once it takes money out of the fund, it is not required to replace it. And the money could be used for general business expenses, Devine said.
“'It is a source of liquidity if we need it," he said. "We can extract it pretty aggressively, if we have to."
Health care costs are a concern for the automaker.
It expects to spend $5.6 billion on health care for active and retired workers and their families this year, compared with $5.2 billion last year. That adds more than $1,000 to the price of each vehicle it produces, the company has said.
GM is working with the United Auto Workers union to try to reduce some of those costs. As part of its current union contract, which runs until 2007, GM and the union agreed to examine ways to cut costs by changing HMOs and preferred provider plans.
But GM executives have said they'd like to give union workers the same plan salaried workers get, which would cost union workers more.
Salaried workers pay for 27% of their health care, while union workers pay for about 7%, according to GM.
After a meeting with GM last week, top union officials said that's not something they'll likely agree to. “'If they'd like to give the salaried employees our plan, we'd be happy to share it with them," said Richard Shoemaker, UAW vice president.
Lance Wallach, an accountant who specializes in VEBA plans, said GM's intention to pull money out of its health care account is a warning shot to the union.
And, "If General Motors gets away with this, it's something that could resonate through the auto industry," he said.
But Dallas Salisbury, president of the Employee Benefit Research Institute, said GM is planning to use the VEBA the way it was intended.
"This is really a shock absorber account that in essence, buys them some time to analyze what they actually want to do," he said. "It gives them greater flexibility in the end."