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Just Me

VEBA Spinoff

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Company is selling a subsidiary. Actuary has suggested that the company establish a VEBA for retiree medical benefits now, and then amend the plan to provide that the VEBA is the sole source of benefit payments with all future funding by employee contributions. Then appoint an independent trustee and "spin off" the VEBA to the participants. The idea is that after the sale of the company, retiree medical benefits can be "locked in" for a period of time, say three years (i.e., buyer is not a party to this arrangement). Actuary has characterized this as a new practice that is gaining popularity.

Anybody seen this idea, and more importantly, see any issues with it?

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If this is a new plan for retiree medical benefits, I don't see any problems.

Are you concerned about employer liability, should the VEBA go bankrupt?

Why not set this up as an employee-pay-all VEBA from the beginning?

Don Levit

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Spin off the VEBA to the participants? Are you sure?

I can see spinning off to a union or association or some created eligible entity (although I cannot think of what), but to the participants, I cannot see how.

Who will be the Trustees and Who appoints them etc?

I am also curious as to where this actuary has seen this and seen this enough times to merit being regarded as gaining in popularity.

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Nowhere does the OP mention control by the participants. It says "spin off".

What does "spin off" mean?

Who does the Trustee answer to after the "spin off"? Certainly not the employer who is no longer involved.

Who is the Plan Sponsor after the "spin off"?

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Nowhere does the OP mention control by the participants. It says "spin off".

Au contraire. What I said in the original post was "Then appoint an independent trustee and "spin off" the VEBA to the participants." "to the participants" means control by the participants. This is what's being referred to as a "new VEBA" concept where the employer is taken out of the picture. GM did this with union retirees, but being subject to a CBA does not seem to be required. The sponsor will be the "Employees Beneficiary Association" that is the VEBA itself.

Sure, this is a new concept, but not impossible. The practicalities of operating the trust seem to be more cumbersome than setting up the actual structure.

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GM did not "spin off" a VEBA nor did it then give control to the participants.

A new VEBA was/will be created under the control of the UAW from day one. There is no "spin off" etc of the VEBA.

A CBA is not relevant unless the covered participants are covered by an applicable CBA. However, retirement benefits promises or obligations are not the exclusive territory of CBAs, contractual liability can be created otherwise.

I do not recall that either Caterpillar or Goodyear etc had CBA's but they did have court challenges etc, the outcomes of which I did not follow.

As I recall none of these employers are fully off the hook in case of underfunding and failure in the future. So it is possible that an employer might not be able to easily walk away even because of a sale of the original employer. One point to keep in mind is that the VEBA and the employer who has the retiree health obligation are two separate entities and contractual obligations might not be transferable absolutely or partially.

I also do not recall that any of the VEBAs set up for retiree health obligations are sponsored by the VEBA itself. In fact, I wonder if a VEBA can sponsor itself as you are sugesting and I hope to see what vebaguru or vebaplan think. This is not to say that they are infallible experts, but they do see more gotchas and twists in a short time, than most will see in a lifetime.

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So that we don't get off topic too far, first, let's not get all hung up on the actuary's use of the word "spin off". Call it a transfer, assignment, shift, whatever you like, by establishment of a new VEBA of which the employer will not have control. Second, yes, the GM case involved a union, to which the VEBA was transferred/assigned/shifted/etc. My OP was asking whether a similar transaction could be possible where there is no union. I have seen reliable sources saying that it can, and that the sponsor/controller of the VEBA need only be an "association."

Having said all that, I was polling the group to see if anyone had been involved in such a transaction (i.e., sans union), and if so what issues arose and any solutions therefor. I belivee that it is possible from a legal perspective, but may not be worth the administrative complexities involved.

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Just me:

I believe you are correct in your assumptions.

There is so much you can do with VEBAs, as we have discussed previously, in that they are non commercial insurers.

For instance, instead of providing equal benefits to all, you may want to vary them in proportion to one's contributions.

You may even want to structure the benefits like a defined-contribution retirement plan, in which if one uses benefits in one year, he has lower benefits the following year.

I sure hope you continue on your path, and even more importantly, find the administrative complexities not much more burdensome than a 401(k).

Don Levit

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Guest BL333

Anyone have any new thoughts on this thread? I am curious whether a VEBA providing post-retirement medical benefits (and which has been prefunding under 419A©(2)) can be transfered to a new VEBA (or whether the original VEBA can be amended) to take the employer out of the picture and have a committee of retirees sponsor the VEBA? I am curious about a non-union scenario.

Will the VEBA still be an ERISA plan once it is transferred and the employer is no longer involved? If not, if you have a VEBA paying retiree health claims (rather than paying retiree health premiums on an insured product), do you need to worry about state insurance regulators?

Many thanks!

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A VEBA need not be a trust. It can be a nonprofit organization which is controlled by its members, with membership conferred by virtue of participation in the plan. However, this may not relieve the employer of actual or potential liability for operation of the trust, for operation of the plan, etc. Who will sponsor the VEBA? And how can this be established without the employer's being a fiduciary? Those are the hard questions.

There is a possibility of an "association" of employees sponsoring the plan and trust. Some states have specific exemption from state insurance regulation for association plans in addition to union sponsored plans. However, most don't. If you try to go down this road, your attorney had better carefully research state law. The association concept will not meet the union exception unless it is employee-controlled AND enters into arms length, good faith negotiations with the employer with respect to the benefits to be provided. If I were one of the employees working with the employer, I would specifically bargain for the employer's continuing liability to provide the benefits promised.

Good luck going down this rabbit hole. You may not like where you wake up!

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Is this new VEBA available only for retirees?

Is there an existing VEBA for current employees?

If the employer is discontinuing the VEBA for current employees, there could be a problem.

See Health Insurance Coverage for Retirees from the Congressional Research Service.

http://www.opencrs.com/rpts/RL32944_20060328.pdf

Look on page CRS-14

An employee is a person who first becomes entitled to participate in the association by reason of being an employee.

So, former employees are employees.

Reg. 1.501©(9)-2(b).

The Association must be an entity having an existence independent of the member employees or their employers, and it is controlled either by its membership or by independent trustees

Reg. 1.501©(9)-2©.

My initial thought about this spin-off VEBA is that depending if there is any employer involvement or not, would answer your question about the possible ERISA plan.

Assuming this is a self-funded VEBA, and it is an ERISA plan, I would think it is not subject to state regulation.

If it is a self-funded non ERISA plan, that would be an excellent question on whether or not it is subject to state regulation.

My guess is that this would still be an ERISA plan, for the retirees were employees initially, and former employees are still considered employees.

Don Levit

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