The New VEBAs

The VEBA Trust has three separate accounts, each holding assets transferred or to be transferred by one of the respective companies and was, at its inception on January 1, 2010, one of the nation’s largest health care operations.

Each separate account will fund an ERISA-covered plan for the benefit of a company’s UAW retirees; one for GM retirees, one for Ford retirees, and one for Chrysler retirees. Since most of the assets transferred by the companies are in a form other than cash, each company applied for a prohibited transaction exemption from the Labor Department. Two of those exemptions have been granted and the third, GM’s, is expected to be granted shortly.

What is new about these VEBA Trust is, first, that as the companies transfer their agreed-upon assets pursuant to settlement agreements in class actions brought under ERISA and section 301 of the Taft-Hartley Act, their OPEB obligations for the Class (i.e., the retirees) and the Covered Group (i.e., individuals still employed, but who upon retirement will be eligible for retiree health benefits from the VEBA Trust) vanish. Poof! As of January 1, 2010, each of the companies’ preexisting health plans ceased its coverage for the Class, and health care coverage under the new plan that is funded through the New VEBA Trust commenced. As members of the Covered Group retire, their health care under their company’s pre-existing plan will cease and they will become covered un the new plan that is funded through the New VEBA Trust.

Second, the VEBA Trust, which is run by a committee consisting of both UAW and independent members, is very much a UAW operation, marking a major departure for the Union, which historically bargained over benefits (including retiree health benefits), but was never interested in administering benefit plans.

Third, the agreed-upon asset transfers by the companies, when complete, are the only funding for the VEBA Trust. Thus, unlike a typical collectively bargained health care plan that operates as a “defined benefit”-type model under which the contributing employer is bound to support the promised benefits, the transferred assets, adjusted by investment experience, are the VEBA Trust’s only source of funding. The VEBA Trust therefore operates much more like a defined contribution-type plan. Depending on investment experience and cost trends, participants in each of the three plans may wind up with benefits that are better or worse than the benefits they would have had if the three companies had continued to operate their pre-existing retiree health plans.

Fourth, bearing in mind that the law allows, but does not require, advance funding of retiree health benefits through a conventional VEBA trust, and that the VEBA trust funding under the three companies’ pre-existing plans covered but a fraction of the total OPEB liability under those plans, the New VEBA trust provides far greater funding security for the three companies’ UAW retirees (and their families) than they had under the pre-existing, company-sponsored plans.

Needless to say, the auto industry New VEBA Trust is a labor-management compromise of epic proportions. It was dictated by economic circumstances that, in recent years, wreaked havoc on the U.S. domestic auto industry (including, but surely not confined to, the market melt-down of 2008). Time will tell how successful this compromise is, but at this stage, it raises the following questions:

Is the New VEBA Trust a model that can be productively employed elsewhere? (I am aware of three other examples: Goodyear; Dana Corp, and AK Steel.)
Would a New VEBA Trust have any utility where the benefits are not retiree health benefits?
Would a New VEBA Trust have any utility where the benefits are not collectively bargained?
Given the demographics (the aging of the boomers, increased longevity generally, the consequent dramatic shift in the ratios of actives to retirees now compared to in the ‘50s and ‘60s, when the retiree health programs began) and the health care cost trends, isn’t it inevitable that others will want to explore the New VEBA trusts as an alternative?
The auto industry New VEBA Trust was designed well before PPACA. Will the new health care law mean that the assets in the Trust will last longer because they will be augmented with taxpayer revenues available to the new plans under PPACA, or does it mean that the assets in the trust will last less long because they will be chewed up with PPACA mandates.
Can each of the plans, for example, apply for the early retiree reinsurance program?

Thoughts, comments?

-- Steven J. Sacher
Jones Day
June 2010