A Way to Defray Healthcare Costs in Retirement
Will your employer pay for your health insurance in retirement? Most won't. The Kaiser Family Foundation found that 33 percent of firms with 200 or more workers offered retirees health coverage in 2005, similar to 36 percent in 2004 but down from 66 percent in 1988. Only 7 percent of small firms offer retiree health benefits. But some companies that don't or that stopped offering retiree health benefits use a voluntary employee beneficiary association (VEBA) to help workers defray health costs in retirement.
VEBAs, established by the Revenue Act of 1928, exempt from federal income tax funds that are held in trust for the payment of benefits to people who have an employment-related common bond. The trust fund can be used to pay health, life insurance, and other benefits to members or their dependents, so long as no part of the fund benefits any single private shareholder or individual. Benefits may or may not be taxable depending on the type of benefit, but the funds themselves and the interest earned are tax exempt.
In 2002, negotiations between United Steelworkers and International Steel Group (which has since been acquired by Mittal Steel USA) established a VEBA to provide prescription drug coverage to 24,000 retirees and spouses who lost coverage after the bankruptcy of four steel companies. Mittal Steel announced this week that because of a surplus in the trust fund, it will also reimburse 41,000 retirees for up to six months of Medicare Part B premiums in a one-time, lump sum payment if they can verify they are enrolled. The Medicare Part B premium is currently $88.50 per month. United Steelworkers says that single retirees will receive checks for $531 and couples will receive $1,062.
There was a use or a perceived misuse of these VEBAs in the '80s, says Mark Iwry, a nonresident senior fellow at the Brookings Institution. Congress then limited the amount of prefunding that would be allowed by private-sector companies.
"Now an employer can fund only a limited amount of the promised benefits," Iwry says, "essentially based on the amount of benefits payable in a year, instead of being able to fund many years of benefits in advance and thereby stuffing the fund with dollars that escape tax."
Mittal Steel's VEBA is funded by a percentage of the company's profits based on the number of tons of steel produced each quarter and the profit per ton, according to Tom Duzak, director of pension and benefits for United Steelworkers. But every VEBA trust works slightly differently. General Motors has VEBA and 401(h) trusts with assets totaling $19.1 billion as of December 2005. During the second quarter and again in the third quarter of 2005, GM withdrew $1 billion from its VEBA trust as a reimbursement for its retiree health insurance payments and life insurance costs. In October 2005, General Motors and United Auto Workers reached an agreement in which, to mitigate the effect of reduced GM healthcare coverage for hourly retirees, GM will make contributions of $1 billion to a defined contribution VEBA in 2006, 2007, and 2011.
VEBAs are common in the public sector, as well, where an employee might choose to deposit the value of unused sick leave tax free, to use for medical expenses in the future, instead of taking a taxable cash bonus.
"In Washington [State], nearly all schools, state agencies, universities, and community colleges can put all unused sick leave cash into these programs," says Mark Wilkerson, a senior consultant for the consulting firm VEBA Service Group, which assists governmental entities to create VEBA trusts. The employee may then be reimbursed from the fund for medical expenses.