Tax Credit Is Possible To Aid Auto Retirees

WASHINGTON -- Labor leaders and U.S. officials seeking a way to pay for Chrysler LLC's and General Motors Corp.'s benefit programs for retirees might find an important source of aid in an obscure federal subsidy covering certain retiree health-care costs.

Under the provision, known as the health-coverage tax credit, the federal government can pay health-insurance premium costs for early retirees -- those between 55 and 65 years old -- if their former employer runs into financial problems and can't pay promised benefits. In recent years, some early retirees from the troubled U.S. steel industry have used the tax credit, which was created by Congress in 2002. Now some retirees from auto-parts makers also want to take advantage of it.

"It's the silver lining in a very, very dark cloud," said Dean Gloster, a San Francisco lawyer representing salaried retirees in the bankruptcy case of car-parts supplier Delphi Corp. Some retirees from Chrysler or GM might also wind up relying on the credit, he said.

The United Automobile Workers union, the White House and the two auto companies didn't respond to requests for comment. Separately, the UAW announced an agreement to amend Chrysler's health liabilities.

"It's the silver lining in a very, very dark cloud," said Dean Gloster, a San Francisco lawyer representing salaried retirees in the bankruptcy case of car-parts supplier Delphi Corp.

Up to now, only a fraction of the people eligible for the health-coverage subsidy have received it, because the subsidy has been little known and the procedure for securing it is complex. The recent stimulus legislation passed by Congress expanded the subsidy and streamlined the process, so now it covers 80% of eligible retirees' health-care premiums, up from 65%.

For auto workers, the health-coverage credit has a potential downside. The law governing the credit says that for retirees to take advantage of it for any long period, their former employer must have terminated its pension plan and turned it over to the Pension Benefit Guaranty Corp., the federal government's safety net.

Workers from GM, Chrysler and Ford Motor Co. don't want the companies to terminate their pension plans, because the workers would take a big financial hit. The basic annual benefits for an early retiree from the Big Three auto makers totaled $32,760 as of 2003, according to UAW data. In contrast, the PBGC pays maximum annual benefits of $18,900 for a 50-year-old retiree, officials said. Besides, many experts say that the pension plans of Chrysler and GM remain in relatively decent shape and might survive even in the case of a bankruptcy filing.

Both companies owe huge amounts on future retiree health-care benefits. In 2007 the Big Three promised to put $56 billion into special health-care trusts for retirees, but they have paid only a fraction of that. The auto industry has many early retirees, who are especially vulnerable because they don't qualify for Medicare, the federal program for seniors.

The UAW and the Obama administration hope to help cover the unfunded retiree health obligation in Chrysler's case by giving a health-care trust set up for workers a major equity stake in the auto company. The trust could use the stake to help cover health-care costs. Such an arrangement could prove to be a hard sell with company creditors, who also want a large equity stake in return for canceling debt owed to them.

If negotiations over Chrysler's future break down, leading to a protracted bankruptcy case, the U.S. auto company could terminate its pension plan for hourly workers, making them eligible for the health-coverage credit. The UAW also has considered asking Congress to tweak the health-coverage credit or other federal aid programs to make them more easily available to auto workers, people familiar with the situation said.

Tax Credit Is Possible To Aid Auto Retirees

By JOHN D. MCKINNON