Human Capital & Careers

Judge Okays GM Retiree Health-care Trust

VEBA arrangement with UAW, preliminarily approved in federal court, would fund medical benefits.
Stephen TaubMarch 5, 2008

A federal judge 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, the Associated Press reported.

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.

“It is an extraordinary feat, it seems to me, that has been accomplished,” U.S. District Judge Robert Cleland reportedly told lawyers for GM and the UAW after a brief hearing. “It’s a very impressive body of work.”

VEBAs are seen as a way for old line manufacturing firms with bloated costs due to historical promises to former and current employees to provide some benefits without bankrupting the companies altogether and enabling them to compete in a nimble global economy.

Indeed, UAW attorney William Payne told Cleland the arrangement protects workers’ benefits regardless of what happens to GM, the AP noted.

“It is much better to have a bird in hand rather than something in the bush,” Payne reportedly said. “GM will not be able to make any more threats in the future that it is going to terminate benefits.”

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., eases the annual funding restriction on companies setting up new trusts, allowing 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, especially in light of an accounting change issued last year. As CFO.com reported in September 2006, the Financial Accounting Standards Board issued FAS 158, which required companies to record the funded 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.

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 is 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 the Detroit News.