Friday, February 27, 2009

Moore on VEBAs

Moorek Kathryn Moore (Kentucky) just posted on SSRN her chapter (NYU Review of Benefits & Executive Compensation) The New Retirement Health VEBAs.  Here's the abstract: 

This article examines the recent trend of transferring employer retiree health care liabilities to VEBAs. After providing a brief history of retiree health benefits and an overview of the basic tax rules governing VEBAs, the article explains the difference between traditional VEBAs and the new retiree health VEBAs. The article then discusses the advantages and limitations of the new VEBAs. The article concludes that the new VEBAs may be an appropriate vehicle for pre-funding retiree health benefits for some employers, particularly financially distressed employers with significant retiree health liabilities and large union forces, but they are not a panacea for the country's health care financing woes.

As Moore points out, in theory, VEBAs should insulate retired and retiring employees from firm performance:  if the firm tanks, money should be left in the VEBA to fund current and future retiree health care.  The rub is described in Section 7.06[2]: firms often fund VEBAs with company stock, which by definition is worthless if the firm tanks. 

In fact, I'd go even a step farther, and suggest (based only on anecdotal, and no empirical, evidence) that a large proportion of firms (automakers, auto parts suppliers) that have been setting up VEBAs in the last year or so are firms that expect to tank, and that are using VEBAs as a vehicle to dump their underfunded retiree health care liabilitesknowing full well that the deposited "assets" are or soon will be worthless.  Their balance sheets look a little better now, and PBGC will be paying the piper later.


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I agree that most of the companies that have been funding VEBAs in recent years are in financial trouble. (According to Segal's 2008 study of retiree health VEBAs, 10 of the 25 retiree health VEBAs were formed as a result of bankruptcy alone and another 7 were formed as a result of collective bargaining in bankruptcy.) Nevertheless, even if the companies' stock becomes worthless, the PBGC does not guarantee retiree health benefits.

(The Segal study is available at (

Posted by: Kathy Moore | Feb 27, 2009 7:03:13 AM

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