Human Capital & Careers

Accounting May Stall GM, Ford VEBAs

The SEC may need to resolve retiree benefit issues relating to FAS 158 before the critical trusts are approved.
Stephen TaubMarch 17, 2008

When U.S. District Judge Robert Cleland earlier this month gave preliminary approval to a plan by General Motors Corp. to set up a voluntary employees beneficiary association, known as a VEBA trust, to fund retiree health care, he told lawyers for GM and the UAW: “It is an extraordinary feat, it seems to me, that has been accomplished. It’s a very impressive body of work.”

Not so fast.

According to the Detroit Free Press, the VEBAs agreed to by the UAW and Detroit automakers GM and Ford Motor must receive certain preferred accounting treatment from the Securities and Exchange Commission. Otherwise, the automakers can walk away from the deal.

Under the agreement, if the regulator opposes the plans, the automakers can renegotiate the deal and fix whatever the SEC objects to, according to the paper.

“GM may immediately terminate the settlement agreement if, after discussions with the SEC, GM does not believe that the accounting treatment…is satisfactory to GM,” the automaker said in its annual report, The Free Press pointed out.

VEBAs gained popularity after a 2003 tax court ruling made the trusts more viable. The ruling, in response to a dispute brought by Wells Fargo & Co., eased the annual funding restriction on companies setting up new trusts, which allowed employers to contribute large lump-sum amounts for current retirees and take the full tax deduction.

That’s important for companies looking to reinforce their balance sheets. But it does raise new issues, in light of an accounting change issued last year in FAS 158. reported in September 2006 about the work the Financial Accounting Standards Board was doing to prepare FAS 158,
which was designed to require companies to record the underfunded or overfunded status of retirement plans on their balance sheets. Included in that reported number are interest-rate effects, an ever-changing risk that some companies view as especially burdensome.

Under the previous accounting model, companies typically reported three quarters’ worth of retirement-plan results, for example, in their 10-K footnotes. But the new standard required most employers — for fiscal years ending after Dec. 15, 2008 — that companies reveal a whole year of plan assets and liabilities on their balance sheets.

The prospect of booking the obligation and its attendant interest-rate risk sent some companies with less-than-stellar balance sheets scrambling for ways to unload the liability. The VEBA appeared to be one solution. The trust bears the financial risk associated with managing the plan and its assets. The union manages the VEBA, and the assets grow tax-free and are untaxed when used to pay benefits, according to an earlier Detroit News story.

“The question is, what’s the likely total obligation, and what is GM still on the hook for?” Lynn Turner, former chief accountant for the SEC, told the Free Press. “That’s where the attention of the SEC and investors will be.”

Last fall, GM and the United Auto Workers agreed to create the trust as part of their overall contract negotiations. If the plan receives court approval, the VEBA would assume $46.7 billion in health care costs starting as early as Jan. 1, 2010, according to the report. It would cover 500,000 GM retirees and spouses, as well as current UAW workers when they retire.

Under Ford’s deal with the UAW, the automaker will remove about $23 billion in retiree health care liabilities from its books by contributing more than $13 billion to the trust.

Other companies that recently agreed to implement a VEBA include Dana, AK Steel and Goodyear.