President &
CEO, Lance
Wallach
Our other Veba
web sites:
VebaPlan.com
FinanceExperts.org
CEO, Lance
Wallach
- Member of the
AICPA faculty of
teaching
professionals. - AICPA author,
instructor &
national speaker. - National Society of
Accountants
Speaker of the
Year. - Writes financial
articles for over 50
national
publications.
Our other Veba
web sites:
VebaPlan.com
FinanceExperts.org
 |
 |
 |
| 2008 Veba Plan LLC All rights reserved. |
October 2007
Are VEBAs the Future of Employee Health Care?
The contract agreement between the United Auto Workers and Detroit's Big Three
automakers have brought health care trusts known as VEBAs-voluntary employees'
beneficiary associations-to national attention. However, the tiny city of Post Falls,
Idaho, may be able to teach the UAW a thing or two about running a VEBA.
By Jeremy Smerd
What do a couple hundred employees who work for the city of Post Falls, Idaho, have
to do with the retired United Auto Workers and their spouses-all 540,344 of them?
They share an acronym: VEBA. What they don't share, not yet at least, is a track record
of saving money on health care costs.
The contract negotiations between the United Auto Workers and Detroit's Big Three
automakers have brought health care trusts known as VEBAs-voluntary employees
beneficiary associations-to national attention. But VEBAs have been used since the
1920s by both large and small employers to fund future health care obligations. Late
last month, GM and the UAW came to a tentative agreement on creating a trust to
relieve GM of its obligation to fund health care retirement costs. The plan calls for GM
to pay about $30 billion into a VEBA trust and another $5.4 billion toward other retiree
health care costs.
Some employers, like Post Falls, have used the flexibility offered by a VEBA to fund
health reimbursement arrangements that have been used to reduce health care
costs.
Michele Sandberg, former human resources director for Post Falls, believes what
can work for a small city in the Northwest-population 23,000-can work for retired
autoworkers.
"You see the [auto] employees panicking, feeling like they have no control," she says.
"Our employees felt the same way, like the employer and the insurance company
were out to get them."
By itself, a VEBA is nothing more than a way for an employer to contribute tax-free to a
fund that can only be used to purchase health and welfare benefits. Many are simply
lockboxes filled with cash that can only be withdrawn to pay for health care costs or
other welfare benefits like life and disability insurance.
VEBAs are becoming more popular among municipalities struggling to meet new
accounting rules that require governments to count future health care costs as a
financial obligation. If they can't pay for that cost-which, given the cost of health care
and the rich benefits government workers receive, is enormous-then the money
owed is listed as debt. This worsens a government's bond rating and makes it
harder to borrow money. Putting the money into a VEBA takes the cost off the books,
says Jay Wettlaufer, manager of operations for Administration Resources Corp., a
benefits administrator in Minneapolis.
For corporations, VEBAs offer a way to make a defined contribution toward health
care costs, ridding themselves of any future health care obligations, says Mark
Wilkerson, senior manager consultant at VEBA Service Group in Spokane,
Washington.
Rather than have costs that fluctuate annually depending on the health of retirees, a
VEBA gives Detroit's Big Three a place where the companies can offload the $104
billion in future retiree health care costs that are estimated over the next 22 to 24
years, according to the Center for Automotive Research-a sum that threatens
automakers with financial ruin. Should Ford and Chrysler strike a deal with the UAW
similar to the one tendered by GM, the union's VEBA trust could be worth as much as
$70 billion.
And given the fact that 64 percent of GM's 73,000-member workforce is eligible to
retire in the next five years, there's no time like the present to get out of paying for
health care, says Kristin Dziczek, senior project manager at the Center for Automotive
Research in Detroit.
"It will be interesting to see how the union manages the VEBA," she says.
Interesting, because there is nothing in a VEBA that guarantees that, once funded, a
VEBA will remain solvent. The money in the VEBA can be invested and the earnings
used to pay for health care costs tax free. But if health care costs grow at double-digit
rates, as they did several years ago, the trust fund could run dry.
"Inevitably, it will run out of money or the benefits will be cut in
the future," says Lance Wallach a leading authority on VEBAs.
So, how do you avoid that?
"Put more money in, which they're never going to do," Wallach
says. "Once it's a deal, that's the deal."
This is where Post Falls may have some lessons to offer, says Sandberg, who is
now a benefits consultant.
About seven years ago, Post Falls was going though what many employers are
experiencing today: Its health care premiums were increasing at astonishing
rates-as much as 30 percent in some years.
The city decided to put the amount it spent on health care annually into a health care
trust to be managed by a third party. Then the city chose a high-deductible health plan
with a health reimbursement arrangement funded from money in the VEBA. This is
known as a VEBA HRA and differs from other HRAs because the money is funded
into accounts owned by the employee. Normally, HRAs are funded by an employer in
name only. The company only parts with HRA money when an employee spends. In
most cases, the employee does not own the money in the account.
Post Falls introduced the high-deductible plan and then told workers that it would
contribute more than 100 percent of the deductible into the workers' VEBA-funded
HRAs. The HRA works more like a health savings account but without the restrictions
common to HSAs-namely, that all medical expenses must first be paid out of pocket
until the deductible is meet.
Post Falls was able to design its health plan so that prescription medicine could be
purchased by employees with only a small co-pay. It allowed employees to get
medicines for chronic illnesses without dipping into their HRAs.
What employees don't use they keep. Last year, premiums dropped 15 percent. This
year, they are up 2 percent.
"The way the city looks at it is the VEBA's like profit-sharing," Sandberg says. "And
[employees] value it. They feel they have control of their benefits. I'd love for the union
members to feel that way over their benefits."
Such a radical retooling of health benefits would be a challenge for autoworkers,
since they have never had to think about the cost of their health care, Wallach
says.
Sandberg's belief in the power of VEBA HRAs to reduce costs compelled her to make
a phone call to Detroit during the UAW's contract talks last month with GM, where she
ended up talking to the Center for Automotive Research. She's still trying to get in
touch with the UAW to tell them the story of Post Falls, Idaho.
"Sometimes," she says, "answers come from small places."
Workforce Management Online, October 2007
Are VEBAs the Future of Employee Health Care?
The contract agreement between the United Auto Workers and Detroit's Big Three
automakers have brought health care trusts known as VEBAs-voluntary employees'
beneficiary associations-to national attention. However, the tiny city of Post Falls,
Idaho, may be able to teach the UAW a thing or two about running a VEBA.
By Jeremy Smerd
What do a couple hundred employees who work for the city of Post Falls, Idaho, have
to do with the retired United Auto Workers and their spouses-all 540,344 of them?
They share an acronym: VEBA. What they don't share, not yet at least, is a track record
of saving money on health care costs.
The contract negotiations between the United Auto Workers and Detroit's Big Three
automakers have brought health care trusts known as VEBAs-voluntary employees
beneficiary associations-to national attention. But VEBAs have been used since the
1920s by both large and small employers to fund future health care obligations. Late
last month, GM and the UAW came to a tentative agreement on creating a trust to
relieve GM of its obligation to fund health care retirement costs. The plan calls for GM
to pay about $30 billion into a VEBA trust and another $5.4 billion toward other retiree
health care costs.
Some employers, like Post Falls, have used the flexibility offered by a VEBA to fund
health reimbursement arrangements that have been used to reduce health care
costs.
Michele Sandberg, former human resources director for Post Falls, believes what
can work for a small city in the Northwest-population 23,000-can work for retired
autoworkers.
"You see the [auto] employees panicking, feeling like they have no control," she says.
"Our employees felt the same way, like the employer and the insurance company
were out to get them."
By itself, a VEBA is nothing more than a way for an employer to contribute tax-free to a
fund that can only be used to purchase health and welfare benefits. Many are simply
lockboxes filled with cash that can only be withdrawn to pay for health care costs or
other welfare benefits like life and disability insurance.
VEBAs are becoming more popular among municipalities struggling to meet new
accounting rules that require governments to count future health care costs as a
financial obligation. If they can't pay for that cost-which, given the cost of health care
and the rich benefits government workers receive, is enormous-then the money
owed is listed as debt. This worsens a government's bond rating and makes it
harder to borrow money. Putting the money into a VEBA takes the cost off the books,
says Jay Wettlaufer, manager of operations for Administration Resources Corp., a
benefits administrator in Minneapolis.
For corporations, VEBAs offer a way to make a defined contribution toward health
care costs, ridding themselves of any future health care obligations, says Mark
Wilkerson, senior manager consultant at VEBA Service Group in Spokane,
Washington.
Rather than have costs that fluctuate annually depending on the health of retirees, a
VEBA gives Detroit's Big Three a place where the companies can offload the $104
billion in future retiree health care costs that are estimated over the next 22 to 24
years, according to the Center for Automotive Research-a sum that threatens
automakers with financial ruin. Should Ford and Chrysler strike a deal with the UAW
similar to the one tendered by GM, the union's VEBA trust could be worth as much as
$70 billion.
And given the fact that 64 percent of GM's 73,000-member workforce is eligible to
retire in the next five years, there's no time like the present to get out of paying for
health care, says Kristin Dziczek, senior project manager at the Center for Automotive
Research in Detroit.
"It will be interesting to see how the union manages the VEBA," she says.
Interesting, because there is nothing in a VEBA that guarantees that, once funded, a
VEBA will remain solvent. The money in the VEBA can be invested and the earnings
used to pay for health care costs tax free. But if health care costs grow at double-digit
rates, as they did several years ago, the trust fund could run dry.
"Inevitably, it will run out of money or the benefits will be cut in
the future," says Lance Wallach a leading authority on VEBAs.
So, how do you avoid that?
"Put more money in, which they're never going to do," Wallach
says. "Once it's a deal, that's the deal."
This is where Post Falls may have some lessons to offer, says Sandberg, who is
now a benefits consultant.
About seven years ago, Post Falls was going though what many employers are
experiencing today: Its health care premiums were increasing at astonishing
rates-as much as 30 percent in some years.
The city decided to put the amount it spent on health care annually into a health care
trust to be managed by a third party. Then the city chose a high-deductible health plan
with a health reimbursement arrangement funded from money in the VEBA. This is
known as a VEBA HRA and differs from other HRAs because the money is funded
into accounts owned by the employee. Normally, HRAs are funded by an employer in
name only. The company only parts with HRA money when an employee spends. In
most cases, the employee does not own the money in the account.
Post Falls introduced the high-deductible plan and then told workers that it would
contribute more than 100 percent of the deductible into the workers' VEBA-funded
HRAs. The HRA works more like a health savings account but without the restrictions
common to HSAs-namely, that all medical expenses must first be paid out of pocket
until the deductible is meet.
Post Falls was able to design its health plan so that prescription medicine could be
purchased by employees with only a small co-pay. It allowed employees to get
medicines for chronic illnesses without dipping into their HRAs.
What employees don't use they keep. Last year, premiums dropped 15 percent. This
year, they are up 2 percent.
"The way the city looks at it is the VEBA's like profit-sharing," Sandberg says. "And
[employees] value it. They feel they have control of their benefits. I'd love for the union
members to feel that way over their benefits."
Such a radical retooling of health benefits would be a challenge for autoworkers,
since they have never had to think about the cost of their health care, Wallach
says.
Sandberg's belief in the power of VEBA HRAs to reduce costs compelled her to make
a phone call to Detroit during the UAW's contract talks last month with GM, where she
ended up talking to the Center for Automotive Research. She's still trying to get in
touch with the UAW to tell them the story of Post Falls, Idaho.
"Sometimes," she says, "answers come from small places."
Workforce Management Online, October 2007
| TaxAudit419.com Lawyer4audits.com VebaPlan.org Taxlibrary.us LanceWallachchfc.blogspot.com The Lance Wallach Network Follow me on facebook & twitter Copyright (C) 2010 - Lance Wallach |
| VEBAHealthCare.com A VEBA Plan LLC site |
| 516-938-5007 wallachinc@gmail.com |
| Serving Clients Nationwide 516-938-5007 Email: wallachinc@gmail.com |