|
NEW YORK (11/20/07) — Retiree health voluntary employees’ beneficiary
associations (VEBAs) have been in the news lately as one way to cover
retiree health care. These VEBAs basically are trusts established to
provide retiree health benefits to current and/or future retirees and have
generally been established as part of collective bargaining. The trusts
are administered by a board of trustees or an administrative board and may
have company, union and/or retiree participation in a board.
Stuart Wohl, senior vice president at The Segal Company and retiree
health care practice leader, points out some of the things that retiree
health VEBAs can do:
- Provide security for retirees (and future retirees) that funds have
been set aside for retiree benefits that cannot be used for any other
purpose. Once a retiree health VEBA is established, the funds in the
VEBA cannot revert to the company. The funds in the VEBA must be used to
cover the clearly defined health, life and/or disability costs.
- Provide a vehicle for companies to remove Financial Accounting
Standards Board FAS 106 liability from its financial statements in
situations where such risk can be transferred to a third party. If a
company has no further required contributions to a retiree health VEBA,
the company may be able to remove that expense and obligation from its
financial statements. Special accounting rules may apply when this
occurs.
- Allow unions and/or retirees more say in the benefits provided and
any required contributions. The union and/or retirees may have seats on
the VEBA’s board of trustees or the administrative board, the body that
is typically formed to determine benefit levels, retiree contributions,
administrators and all other aspects of the plan.
- Provide an option that removes the company from decision-making
responsibility for retiree health benefits. In situations where the
liability has been transferred to a third party, the company may remove
itself from further decision-making responsibilities.
- Provide a funding vehicle for collectively bargained situations. In
a collectively bargained environment (and with proper IRS approval), the
retiree health VEBA could fund 100 percent (or more) of the projected
benefit costs.
- Allow funds to be collected from a company through a variety of
mechanisms including cash or company stock or other assets. Funding can
also be provided through profit sharing, production bonuses and wage
deferrals from active employees.
Mr. Wohl cautions that retiree
health VEBAs cannot:
- Avoid investment return risk. The VEBA will need to invest the
assets. There is no guarantee as to the level and timing of the
investment return. The board of trustees or administrative board will
need to work with an investment consultant to determine the appropriate
level of risk and commensurate expected return it should pursue.
- Avoid health care cost trend risk (unless benefits are fixed to
dollar amounts). It is impossible to predict exactly what will happen to
health care costs six months, six years or 60 years into the future.
Many of these retiree health VEBAs have projected time horizons of more
than 60 years.
- Guarantee health care benefit levels. VEBA funding is at risk for
investment return and health care cost trend mentioned above. As such,
it is not possible for a retiree health VEBA to guarantee a certain
benefit level for any amount of time without having a very conservative
investment strategy and a fixed benefit level (such as a fixed dollar
reimbursement towards coverage). Even with those conditions, a retiree
health VEBA has exposure to other risks including mortality, Medicare
solvency and other potential company funding streams such as profit
sharing.
Mr. Wohl concludes, “Retiree health VEBAs are one
vehicle that companies, unions and retirees can use to manage future
retiree health costs. They can be designed to provide benefits for current
and future retirees for duration of half a century or more. But, they are
not a panacea as there are limits on what they can achieve.”
|