[Federal Register Volume 73, Number 231 (Monday, December 1, 2008)]
[Notices]
[Pages 72841-72844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-28325]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF LABOR


Office of the Assistant Secretary for Policy; Retiree Health 
Policy

AGENCY: Office of the Assistant Secretary for Policy, DOL.

ACTION: Request for information.

-----------------------------------------------------------------------

SUMMARY: This document requests information from the public to assist 
the Department of Labor in studying and understanding the role of 
Voluntary Employees' Beneficiary Associations in providing health and 
welfare benefits to retired workers in the United States.

DATES: Written or electronic responses must be submitted to the 
Department of Labor on or before December 31, 2008.
    Responses: To facilitate the receipt and processing of responses, 
OASP encourages interested persons to submit their responses 
electronically to http://www.regulations.gov. Persons submitting 
responses electronically should not submit paper copies. Persons 
interested in submitting written responses on paper should send or 
deliver their responses (preferably, at least three copies) to the 
Office of the Assistant Secretary for Policy, Frances Perkins Building, 
200 Constitution Avenue, NW., Room S-2312, Washington, DC 20210. All 
written responses will be available to the public, without change, 
online at ------------.

FOR FURTHER INFORMATION CONTACT: Kathleen Franks, Office of the 
Assistant Secretary for Policy, Room S-2312, U.S. Department of Labor, 
Washington, DC 20210, telephone (202) 693-5959. This is not a toll-free 
number.

SUPPLEMENTARY INFORMATION: 

A. Background

    An important goal of the Department of Labor (the Department or 
DOL) is to advance the public's knowledge and understanding of 
retirement savings and health benefits and their critical importance to 
the future well-being of workers and their families. The Employee 
Benefits Research Institute

[[Page 72842]]

(EBRI), a major industry funded research group, recently reported in 
its 2008 Retirement Confidence Survey (RCS), that health care costs 
have become an important issue for retirees, with almost half of 
retirees saying they have spent more than expected on health care 
expenses.\1\ The EBRI survey found that 34 percent of all workers now 
expect to have access to employer-sponsored health insurance in 
retirement, down 8 percentage points from 2007. The survey also found 
that, although 41 percent of retirees say they currently have access to 
health insurance through a former employer, many employers are 
eliminating health care coverage for future retirees. A key policy 
question, therefore, is how to better help employers and employees 
prepare for post-retirement health care costs.
---------------------------------------------------------------------------

    \1\ See EBRI Issue Brief No. 316, The 2008 Retirement Confidence 
Survey: Americans Much More Worried about Retirement, Health Costs a 
Big Concern (April 2008), available at http://www.ebri.org.
---------------------------------------------------------------------------

    In 1928, the Internal Revenue Code (the Code) was amended to 
provide tax-exempt status for a Voluntary Employees' Beneficiary 
Association (VEBA). VEBAs are one way that employers can fund and pay 
for welfare benefits for their employees. The federal government 
primarily regulates VEBAs through the Code, U.S. Department of the 
Treasury (Treasury) regulations, and DOL regulations related to the 
Employee Retirement Income Security Act (ERISA). Section 501(c)(9) of 
the Code defines a VEBA as an association organized to pay life, sick, 
accident, and similar benefits to members or their dependents, or 
designated beneficiaries. Typically established as a trust, the VEBA 
uses its assets to pay eligible benefits under a plan. Employer 
contributions to a VEBA for retiree health coverage may be excludable 
from an employee's gross income under section 106 of the Code. Retiree 
health benefits paid from a VEBA are generally excludable from 
retirees' gross income under section 105(b) of the Code and a VEBA's 
income is generally exempt from taxation.\2\ To qualify as a VEBA, an 
association must meet, among other requirements, the following 
requirements under Section 501(c) (9) of the Code and Treasury 
regulations at 26 CFR Section 1.501(c) (9)-1:
---------------------------------------------------------------------------

    \2\ However, a VEBA's income, including income on amounts set 
aside for post-retirement medical benefits, might be subject to 
unrelated business income tax. See sections 511 and 512 of the Code 
and Treasury regulations at 26 CFR 1.512(a)-5T, Q&A-3. Finally, the 
Code provides guidance regarding the type of health benefits that 
may be received by employees and retirees on a tax-free basis.
---------------------------------------------------------------------------

    (a) It must be an employees' association;
    (b) Membership in the association must be voluntary; \3\
---------------------------------------------------------------------------

    \3\ Although membership in a VEBA must be voluntary for the 
participating employees, an association is considered voluntary 
although membership is required of all employees, provided that the 
employees do not incur a detriment (for example, in the form of 
deductions from pay) as a result of membership in the association. 
Nor will an employer be deemed to have imposed involuntary 
membership on an employee if membership is required as the result of 
a collective bargaining agreement or as an incident of membership in 
a labor organization.
---------------------------------------------------------------------------

    (c) The organization must provide for payment of life, sick, 
accident, or other benefits to its members or their dependents or 
designated beneficiaries, and substantially all of its operations must 
be in furtherance of providing such benefits; and
    (d) No part of the net earnings of the organization may inure, by 
other than by the payment of benefits referred to in paragraph (c) 
above, to the benefit of any private shareholder or individual.
    The membership of a Section 501(c)(9) VEBA must consist of 
individuals who are employees with an employment-related common bond. 
This common bond may be a common employer or affiliated employers, 
coverage under one or more collective bargaining agreements, membership 
in a labor union, or membership in one or more locals of a national or 
international labor union. Thus, a VEBA can fund benefits for employees 
and retirees of a single employer or, in certain cases, for a group of 
employers.
    A trust does not satisfy the requirements for VEBA status under 
Section 501(c)(9) of the Code unless it gives timely notice to the 
Internal Revenue Service (IRS) that it is applying for recognition of 
such status,\4\ and receives such recognition from IRS. In addition, a 
VEBA must meet certain nondiscrimination requirements under Section 505 
of the Code, unless it is part of a plan maintained pursuant to a 
collective bargaining agreement and the plan was the subject of good 
faith bargaining between employee representatives and employers.\5\
---------------------------------------------------------------------------

    \4\ IRS Form 1024 is used for this purpose. See 26 CFR 1.501(a)-
1(a)(2), 1.505(c)-1T.
    \5\ For other rules regarding VEBAs, see generally 26 CFR 
1.501(c)(9)-2 through 1.501(c )(9)-9.
---------------------------------------------------------------------------

B. Laws Regulating VEBAs

    A VEBA that is part of a private sector employee welfare benefit 
plan must also adhere to the fiduciary, annual reporting, disclosure 
and other requirements of ERISA, which are administered by the 
Department's Employee Benefit Security Administration (EBSA). Persons 
responsible for investment and management of the VEBA's assets are 
fiduciaries, and must comply with ERISA's general prudence and 
prohibited transaction provisions. The employee welfare benefit plans 
funded by a VEBA generally must also file an annual Form 5500 financial 
report. If the plan has 100 or more participants, the annual report 
must include an audit report prepared by an independent qualified 
public accountant.
    Pursuant to ERISA's annual reporting requirements, the audit report 
must comply with American Institute of Certified Public Accountants 
(AICPA), Statement of Position (SOP) 92-6, Accounting and Reporting by 
Health and Welfare Benefit Plans, which governs employee benefit plan's 
accounting for post-retirement benefits other than pensions. SOP 92-6 
was issued in August 1992 and generally became effective for single-
employer plans for plan years beginning after December 15, 1992.\6\ 
Employer accounting for postretirement benefits other than pensions 
must comply with Financial Accounting Standard Number 106 (FAS 106), 
Employers' Accounting for Postretirement Benefits Other Than Pensions. 
FAS 106 was issued in December 1990 and became mandatory for most 
employers for fiscal years beginning after December 15, 1992.\7\
---------------------------------------------------------------------------

    \6\ SOP 92-6 was subsequently amended by Statement of Position 
01-02, issued in April 2001. SOP 01-02 clarifies some of the 
disclosures required by SOP 92-6.
    \7\ FAS 106 was amended by the issuance of FAS 132, Employers' 
Disclosures about Pensions and Other Postretirement Benefits, issued 
in February 1998, which revised employers' disclosures about pension 
and other postretirement benefit plans.
---------------------------------------------------------------------------

    ERISA does not impose an explicit requirement on employers or on 
unions to fund VEBAs, nor does it outline any rules for determining 
what a ``proper'' level of funding for a VEBA would be. Rather, 
employer contributions to VEBAs are generally made either on a 
contractual basis or at the employer's discretion.\8\ Some VEBAs are 
established based on a collective bargaining agreement requiring the 
employer to make a substantial initial payment and then much smaller, 
if any,

[[Page 72843]]

additional payments thereafter. These funds are invested, and some 
combination of the initial assets and the returns on the investments 
are then used to pay benefits over time. Naturally, the size of the 
initial payment, the returns on the investments, and the level of 
benefits provided will have major impacts on the VEBA's ability to pay 
for benefits over the long-term.
---------------------------------------------------------------------------

    \8\ Sections 419 and 419A of the Code, which set forth specific 
rules regarding the amount and timing of employer deductions for 
contributions to VEBAs and other welfare benefit funds, were enacted 
in DEFRA, in response to concerns with abuses of VEBAs and other 
welfare benefit funds. DEFRA also added Code section 512(a)(3), 
which contains special rules for computing the unrelated business 
taxable income of a VEBA, and section 4976, which provides for an 
excise tax on certain benefits paid from welfare benefit funds 
(including VEBAs) and on reversions to the benefit of the employer 
of any portion of a welfare benefit fund.
---------------------------------------------------------------------------

    Depending on the purpose of a VEBA with fixed initial assets, the 
fiduciaries charged with administering the employee welfare benefit 
plan may be faced with difficult choices. Unless the VEBA's investment 
returns cover all the costs incurred by the VEBA for payment of 
benefits and administration, the assets of the VEBA will diminish over 
time, and eventually the VEBA may be unable to continue to pay the plan 
benefits. Thus, depending on its level of initial funding, a plan 
funded solely through a diminishing-asset VEBA faces a potential trade-
off between the level of health benefits secured by the VEBA and the 
length of time that the plan will be able to continue to provide 
benefits. This could result in conflicting interests between older 
participants, who may be primarily interested in maximizing the value 
of short-term benefits, and younger participants, who may have a 
greater interest in maximizing the number of years that the plan is 
able to provide benefits. When considering this trade-off, plan 
participants should be aware that, even in an apparently well-funded 
VEBA, investment risks and other cost factors may affect the VEBA's 
financial condition and may, in some cases, necessitate that plan 
benefits be substantially reduced.

C. The Department's Observations on VEBAs

    The Department has observed that employers, particularly large 
employers with unionized workforces, are increasingly exploring the 
financial, tax and accounting advantages of transferring retiree health 
liabilities to a stand-alone VEBA not managed or controlled by the 
employer. Most notably, recent agreements between several automobile 
manufacturers and the United Auto Workers (UAW) union have called for 
the establishment of stand-alone VEBAs to fund retiree health care 
liabilities. These VEBAs were formed pursuant to settlements resolving 
long-standing disputes between the UAW and the auto makers regarding 
the extent to which the auto makers had a legal obligation to continue 
to provide health care benefits to retired workers. The settlements 
call for the new VEBAs to be funded with tens of billions of dollars in 
assets transferred from the automobile manufacturers. Both the 
investment strategies for the VEBAs and the level of benefits paid by 
the plans funded through the VEBAs will be set by an eleven member 
board of which five are appointed by the UAW, and the other six 
individuals selected initially by the judge approving the settlement. 
Under the terms of the settlement agreement, a candidate for a vacancy 
among the six non-UAW-selected board positions would be selected by a 
favorable vote of nine of the existing board members with arbitration 
available in the event of deadlock, giving the UAW-selected members 
substantial control over the process.
    The Department reviewed documents that were publicly disclosed 
during the litigation and discussed the formation of the VEBAs with the 
parties. Some of the specific concerns raised by the Department were 
whether the investment expectations that had been used to calculate the 
VEBAs' longevity were set at unrealistically high levels, and whether 
the projected cost of providing benefits was set too low. The 
Department was also concerned that the plan documents did not provide 
the trustees with any guidance on how, in the exercise of their 
fiduciary duties, they should resolve the inherent conflict of interest 
between older workers, who might prefer higher benefit levels even if 
those higher benefits exhaust the VEBAs more quickly, and younger 
workers, who might prefer somewhat lower benefits if that meant that 
the benefits would be available over a longer period of time. As a 
result of these discussions, the parties agreed to make available to 
the beneficiaries and other interested members of the public more 
financial information about the VEBAs, including more information about 
the various financial and actuarial assumptions behind the VEBAs. The 
parties also agreed to a modification in the trust agreement governing 
the VEBAs to clarify the intent of the parties and provide guidance to 
the fiduciary Committee members that ``[i]n exercising its authority 
over benefit design, the Committee shall be guided by the principle 
that the Plans should provide substantial health benefits for the 
duration of the lives of all participants and beneficiaries.''
    The Department is interested in learning whether broader changes in 
the labor market may result in changes in retiree health plan offerings 
and how VEBAs can play a role in accommodating those changes. Examples 
of these changes may include the aging of the labor force and 
increasing number of retirees, the increasing concentration of 
employment in the service sector, and changes in skill, productivity, 
and compensation patterns. The labor market may be affected by 
increases in the cost and utilization of health care, and by global 
competition facing plan sponsors. Changes in the labor markets, 
including effects on retirement ages, labor force participation, career 
patterns, and the way in which workers are compensated, may ultimately 
affect group and individual health insurance markets, government 
programs, and the demand for health care goods and services.
    Recent regulatory changes which will allow employers to coordinate 
retiree health benefits with Medicare for Medicare-eligible retirees 
may also spur interest in how plans funded by VEBAs can be used to 
provide retirees health care coverage that ``bridges'' the gap between 
retirement and eligibility for Medicare or cover additional expenses 
not covered by Medicare. Specifically, a final rule published by the 
Equal Employment Opportunity Commission (EEOC) in December 2007 permits 
employers to create, adopt or maintain a wide range of retiree health 
plan designs that provide different coverage for retirees age 65 and 
over without violating the Age Discrimination in Employment Act. The 
rule also allows unions to negotiate for health benefits that 
coordinate with Medicare.\9\
---------------------------------------------------------------------------

    \9\ See EEOC Final Rule under 29 CFR Parts 1625 and 1627 on Age 
Discrimination in Employment Act and Retiree Health Benefits, 72 
Fed. Reg. 72938 (Dec. 26, 2007).
---------------------------------------------------------------------------

    Finally, the Department is aware of recent research on VEBAs that 
has highlighted the benefits from VEBAs to employers and employees, and 
that suggests that VEBAs may be a desirable option for them. One recent 
study, by the Segal Company, entitled Study of Retiree Health VEBAs, 
examined 25 stand-alone VEBAs in the manufacturing, retail or 
transportation industries (Segal Study).\10\ According to the Segal 
Study, VEBAs can provide security for current and future retirees by 
setting aside funds for retiree benefits that cannot be used for other 
corporate purposes. It also noted that VEBAs are a vehicle for an 
employer to remove FAS 106 liability from its financial statements, and 
that employers can fund the trust through a variety of mechanisms, 
including cash, company

[[Page 72844]]

stock, or other assets. The Segal Study further pointed out that VEBAs 
may allow unions and retirees more input into benefit levels and 
contributions because they may have seats on the VEBA's board of 
trustees or other governing body. On the other hand, the Segal Study 
suggested that it is not possible for VEBAs to guarantee a set level of 
benefits far into the future, or to provide retirees with protection 
from investment risk, because the financial condition of the trust may 
be adversely affected by unpredictable risks, downturns in the market, 
or health care cost increases.
---------------------------------------------------------------------------

    \10\ http://www.segalco.com/publications/surveysandstudies/2008VEBAs.pdf. For another synopsis of the Segal Study, see Wohl, 
Under the Hood: After Acceptance from UAW, VEBAs Get a Closer Look, 
Employee Benefits News (March 2008) (available at 
ebn.benefitnews.com/asset/article/547851/under-hood-after-acceptance-uaw-vebas.html?pg=).
---------------------------------------------------------------------------

    Another study, the Mercer 2007 National Survey of Employer-
Sponsored Health Plans (Mercer Study), found that among employers with 
500 or more employees that offer retiree health insurance, 11 percent 
use a VEBA to fund it, and an additional 5 percent are considering 
using one. The Mercer Study also determined that VEBA use is most 
common among the largest retiree health sponsors (28 percent of those 
with 10,000 or more employees) and those in the transportation-
communications-utilities industry group (38 percent), followed by the 
financial services (19 percent) and manufacturing (13 percent) industry 
groups.\11\
---------------------------------------------------------------------------

    \11\ See http://www.mercer.com/referencecontent.jhtml?idContent=1287790
---------------------------------------------------------------------------

    Finally, a recent paper by Aaron Bernstein entitled ``Can VEBAs 
Alleviate Retiree Health Care Problems?,'' published as part of the 
Harvard Law School Pensions and Capital Stewardship Project Labor and 
Worklife Program, examined VEBAs in the context of declining retiree 
health coverage and discussed the ways that VEBAs could help union and 
nonunion employees in both the private and public sector.\12\
---------------------------------------------------------------------------

    \12\ The article is available at: http://www.law.harvard.edu/programs/lwp/occasionalpapers_Ap9_.
---------------------------------------------------------------------------

D. Request for Information

    The purpose of this notice is to obtain information to assist the 
Department in studying and understanding the role of VEBAs in providing 
health and welfare benefits to retired workers in the United States. In 
order to assist interested parties in responding, this document 
contains a list of specific areas of interest. The Department 
recognizes that these areas of interest may not address all relevant 
issues. Accordingly, interested parties are invited to submit comments 
on other issues that they believe are pertinent.
    1. What economic and demographic forces are driving changes in 
retiree health plan offerings and VEBA use?
    2. What are the consequences to employees, employers, and the 
public of increasing VEBA use by employers to fund retiree health 
benefits?
    3. Is there a need for changes in ERISA or in the Department's 
ERISA regulations to better govern the administration of VEBAs?
    4. Should VEBAs that are larger, whether in terms of assets, number 
of beneficiaries, or both, be subject to different regulatory 
requirements than smaller VEBAs?
    5. Aside from the general fiduciary obligations imposed by ERISA, 
should other requirements be imposed on VEBA governance structure to 
better protect the economic interests of participants?
    6. Should plan documents for VEBAs be required to provide 
fiduciaries guidelines on benefit payments to help the fiduciaries 
resolve any conflicts of interest that may develop between participants 
at different life cycle stages?
    7. Should the law require that participants in plans funded by 
VEBAs must be provided with actuarial information indicating the 
potential range of benefits the plan is likely to be able to provide, 
taking into account potential future benefits, investment returns, and 
changes in the cost of health benefits?

Leon R. Sequeira,
Assistant Secretary for Policy.
 [FR Doc. E8-28325 Filed 11-28-08; 8:45 am]
BILLING CODE 4510-23-P