Abstract
The Detroit automakers’ Retiree Medical Benefits Trust is the nation’s largest Voluntary Employees’ Beneficiary Association (VEBA). It is an independent trust with assets of $60 billion that is responsible for providing medical, prescription drug, dental and vision benefits to 720,000 hourly retirees, surviving spouses and dependents of General Motors, Ford and Fiat Chrysler. It was established in 2007 through the joint efforts of the Big Three Detroit automakers and the United Automobile Workers Union primarily to protect the health care benefits of hourly retirees and to provide the companies with financial relief from the burdens of legacy costs that eventually contributed to their bankruptcies. Although it is now viewed as a success, there were times in its history when its inception and future were seriously in doubt. A review of its history will inform HR professionals of the problems and solutions they may encounter in establishing a VEBA.
Keywords
In recent years, many large employers have been forced to reduce or eliminate medical benefits of retired employees due to the increasing cost of health care. One of the strategies being actively considered by many companies is to fund retiree medical benefits through a Voluntary Employees’ Beneficiary Association or VEBA. 1 In 2007, the Big Three Detroit automakers and the United Automobile Workers Union (UAW) agreed to establish a VEBA as an independent trust with assets of $60 billion to provide health care benefits to 720,000 hourly retirees and surviving spouses. It was established primarily to protect the health care benefits of retirees and to provide the automakers with financial relief from the burdens of huge legacy costs. It is the nation’s largest VEBA. Prior to its establishment, each of the companies was responsible for funding and managing health care programs for its hourly retirees.
Although the VEBA is now seen as a success, the road to getting here was filled with monumental challenges that threatened its very existence and ability to thrive in difficult times. The establishment and development of the VEBA are examined here through the experiences of its largest contributing company, General Motors (GM), which were similar to those of the other VEBA contributors, Ford Motor Company and Fiat Chrysler Automobiles.
What Is a VEBA?
A VEBA is a tax-exempt mutual association of employees that provides certain benefits to its members or beneficiaries that is funded by employees and/or their employer. The VEBA was given tax-exempt status in the Revenue Act of 1928. Although employer contributions to a VEBA for current health benefits are tax-deductible, the significant limitations on deductions of contributions for future health care benefits have been the primary reason VEBAs are not more widely used by employers. One exception is contributions to a collectively bargained plan, which are fully deductible, as in the case of the automakers’ VEBA. As of 2006, there were 12,206 VEBAs in the United States.
Any group of employees sharing an employment-related common bond may establish a VEBA. Employers may establish one on behalf of the employees. Funds in the VEBA are held in trust to pay for benefits, including life, sickness, accident and medical benefits. The VEBA may promise a benefit that it may or may not be able to deliver for various reasons. There is no clear requirement that the employer adequately fund a VEBA. VEBAs may be controlled by companies or an independent board of trustees.
Typically, employers use VEBAs to separate funds from their general assets to pay for health care benefits of active workers or retirees. In these internal VEBAs, employers retain control over VEBA funding and administration, as the arrangement is used as a funding vehicle for employer-sponsored plans.
Stand-alone or independent VEBAs differ from internal VEBAs in that they are generally designed to operate somewhat or fully independently of the employer on behalf of retirees (see Figure 1). These VEBAs are commonly established for several purposes—as part of a negotiated settlement of liabilities in bankruptcy, as an outcome of collective bargaining when an employer in financial distress proposes a restructuring of its health care benefit obligations as an alternative to bankruptcy or as a method of settling a class action lawsuit brought by retirees, a union or both to prevent termination or modification of retiree benefits.2 -4

Some facts on Voluntary Employees’ Beneficiary Associations.
UAW Retiree Medical Benefits VEBA
The UAW Retiree Medical Benefits Trust or VEBA is responsible for providing medical, prescription drug, dental and vision benefits to UAW retirees, surviving spouses and dependents of GM, Ford and Chrysler. To provide these benefits, a committee of trustees that governs the VEBA can only use assets in the VEBA trust.
The VEBA consists of three employees’ beneficiary associations—one for each company—that have separate accounts in the trust. Health care benefits for one company’s retirees can only be paid out of its account and cannot be paid out of the accounts of the other two companies. Because of different funding levels, benefits for retirees of certain companies at times have been below the intended uniform level. Operating finds were contributed by the companies at startup and have been supplemented by continuing and onetime diversions of the pay of active employees.
The trust is not controlled and operated by the UAW or the companies. Oversight is provided by a committee of 11 trustees—6 are independent and 5 are UAW-affiliated representatives. There are no company-affiliated representatives on the committee. A vote of nine trustees is generally required for the committee’s action to take effect. The trustee committee is responsible for designing and delivering medical benefits to eligible members. The committee hired a staff of health care and investment professionals to manage the plan (see Figure 2). 5

Profile of the Automakers’ Voluntary Employees’ Beneficiary Association (2014).
Original, Internal VEBA
The idea to establish a VEBA grew out the financial distress that the automakers experienced in the mid-1990s and early 2000s, as sales of high-profit vehicles declined and the costs of health care increased at alarmingly high rates.
In 2004, health care costs were clearly a top-of-mind issue with the leadership team at GM. An entire page in its 2004 annual report to shareholders was devoted to the subject. The company stated,
The sustained, rapid increases in the cost of health care in the United States have had a tremendous impact on GM’s profitability, as they have for many other companies. This is a major competitive issue for all of American business—especially manufacturers—in an increasingly global economy.
The company spent $5.2 billion on health care for its 1.1 million employees and retirees. The cost contributed $1,500 to the cost of each vehicle made in the United States. GM stated that its foreign-owned domestic competitors had just a fraction of these costs, because they have few, if any, U.S. retirees. At home, their governments cover a substantially larger share of employee and retiree health care costs.
In 2005, GM’s annual report stated that 2005 was one of the most difficult years in its 98-year history. Two fundamental weaknesses were exposed in its U.S. operations—its inability to adjust operations in response to falling sales and its huge legacy cost burdens of providing pensions and health care benefits to retirees. The rise in gas prices and changes in consumers’ tastes were driving consumers away from its most profitable vehicles: light trucks. In 2005, the company lost $3.4 billion, excluding special items, and a reported loss of $10.6 billion, on revenues of $192.6 billion.
Regarding legacy costs, GM stated that although it was currently a far leaner and more productive automaker, it still had a significant financial burden from the past. For every active employee in the United States, the company supported 3.2 retirees and surviving spouses. In 1962, the ratio had been reversed and there were 11.5 active employees for every retiree and surviving spouse.6,7
The VEBA Seed Is Sown
To address the health care legacy costs, GM approached the union to discuss modifying hourly retiree health care benefits. When the union refused to consider the subject, GM responded that it would take unilateral action, since its commitment to retirees was not explicately stated. The union, on the other hand, believed the company had made implicit promises to continue health care benefits after employees retired and that the benefits were “vested.” In its 72year bargaining history, the union had reopened its collective bargaining agreement one time.
Because of the rapidly deteriorating finance condition at GM and to avoid a battle in the courts over whether GM had the right to make unilateral changes that it might lose, the union agreed to negotiate a settlement agreement over what actions to take to alleviate the cost burden of providing retiree health care benefits. Financial experts were engaged to verify GM’s financial condition in relation to legacy costs.
Since the parties were unsure of their rights to act on behalf of retirees, the UAW took the precautionary step of recruiting several retirees to file a class action lawsuit to react to and perhaps challenge the agreement. The cost of the lawsuit was borne by the union and the company. Federal district and appeals courts eventually approved the GM settlement and a parallel settlement at Ford.
In 2005, the companies were providing retirees with an excellent health care benefits. Retirees made no annual contributions to the plan, copayments and deductible were low and the companies were reimbursing retirees who were eligible for Medicare for the cost of purchasing Medicare Part B coverage to reduce the company’s exposure to outpatient medical expenses. 8
“Internal VEBA” Established
The 2005 health care settlement agreement had the following provisions:
The company continued to pay for most of the retirees’ health care costs.
Retirees (except for very low income ones) would pay out-of-pocket costs for the first time—$370 for individuals and $752 for families in annual contributions, copayments and deductibles.
A VEBA was established to mitigate the costs now borne by retirees. The VEBA, which was not independent of the company, did not provide benefits and was primarily a funding mechanism.
GM would contribute $3 billion in cash to the VEBA through 2011, along with at least $30 million a year in profit-sharing payments of active employees from 2006 through 2012.
GM would make cash contributions to the VEBA based on the increase in the value of 8 million shares of GM common stock.
If GM raised dividends on its common stock within certain parameters, GM would make additional substantial cash contributions.
Active workers would forgo base wage and cost-of-living adjustments of about $2,000 a year that would add $4 billion to the VEBA over the next 20 years.
GM expected to reduce its annual health care expenditures by $3 billion and shed $15 billion of its accumulated retiree health care obligations.
At the time the agreement was announced, GM reported a $1.6 billion loss for the third quarter of 2005. Losses for the year were $3.4 billion. Ford lost $1.9 billion from continuing operations in 2005. In 2006, Ford lost $2.8 billion on continuing operations and an additional $9.9 billion related to costs to reduce the size of and to reorganize the company, buy out workers and write down assets. The total loss of $12.7 billion was its worst year in its history. 9
2006—Glimmers of Hope
In its annual report for 2006, GM stated that the company was in a crucial period in its history. There were signs that GM’s turnaround plans for the company were paying off, as it was in a much better position than in 2005. Adjusted net income improved by $5.4 billion to a profit of $2.2 billion. When restructuring and other charges were included, it had a net loss of $3.2 billion, an $8.4 billion improvement.
To improve its liquidity, it sold off assets to raise $13 billion over 3 years, including 51% of its equity in its highly valuable auto financing unit. The workforce was reduced by 34,000 hourly positions. Despite its efforts, the company had a negative cash flow of $3.8 billion from automotive operations.
Due largely to the milestone 2005 agreement on sharing health care costs with employees and retirees, related expenses were down by half a billion dollars to $4.8 billion and liabilities by $15 billion. Nevertheless, GM stated that health care costs put it at an unsustainable disadvantage with foreign competitors and that the upcoming 2007 negotiations with the UAW presented a golden opportunity to address the issue. Although GM was not declaring victory in its efforts to turnaround the company, there were glimmers of hope. 10
2007—Independent VEBA Struggles to Be Born
In 2007, GM made considerable progress in revitalizing the company by negotiating a concessionary labor contract with the UAW after a 3-day strike. The contract was projected to save GM about $1,000 in the cost of producing each vehicle by reducing labor costs by about $4 billion annually. In exchange for giving up annual base pay increases and allowing GM to establish substantially lower wage rates for new hires, the union received job security commitments.
Another important feature of the contract was the establishment of a second, independent VEBA that would allow the three companies to transfer complete responsibility for funding and managing retiree health care programs to the VEBA. The VEBA that was established in 2005 continued and was folded into the new VEBA. Since the new VEBA would be independent of the companies, the union believed it protected retiree health care benefits should a company go bankrupt. The union also anticipated that the VEBA would be able to negotiate more favorable service contracts with hospitals and doctors than the companies could separately, by virtue of its greater number of participants (about 720,000), making health care benefits less costly and more sustainable.
The VEBA was funded by a $35 billion contribution from GM and by diversions and conversions of wages of active employees ($3.8 billion). Estimated savings to GM were projected to be about $3 billion annually when the VEBA went into effect on January 1, 2010. Ford and Fiat Chrysler made contributions to the VEBA based on their retiree health care commitments. 11
The Great Recession: Can the VEBA Survive a Bankruptcy?
The Great Recession of December 2007 to June 2009 dealt the auto companies a devastating blow. GM and FCA were forced into structured bankruptcies that were supported by government loans of $50 billion and $12 billion. Ford avoided bankruptcy by borrowing $23 billion before the recession started.
As a condition to receive the government loans, GM had to submit a restructuring plan to the government demonstrating a path to long-term viability. GM’s plans included the closure of 16 U.S. facilities and the elimination of the Saturn, Pontiac and Hummer brands. Severe and drastic cuts were made to the workforce, and the Chairman of the Board of Directors was forced to resign. Stock in the company became worthless, and stockholders received neither any compensation under the bankruptcy plan nor rights to stock in the reorganized company.
In addition, modifications were required to compensation and benefit programs that primarily affected the VEBA. Due to prior concessions, there was no loss of hourly pay, a reduction in health care benefits of active employees and a reduction in pension benefits.
The major reductions in retiree health care benefits included the following actions:
Prescription drug copays were increased.
The vision program was discontinued.
The dental program was discontinued.
Payment of the Medicare Part B benefit ($72/month) was discontinued. Monthly contributions to the VEBA deductibles and copays for health care services were unchanged. In general, under the bankruptcy restructuring, the automakers were allowed to use more company stock to fulfill their financial obligations to the VEBA. As of December 31, 2010, it had the following investments in GM:
Common stock: 160.15 million shares valued at $5.49 billion
GM warrants: 45.45 million warrants (the right to purchase GM shares at the set price), valued at $387 million
GM preferred stock: 260 million shares valued at $7.37 billion
GM note valued at $2.8 billion in cash 12
2010—The VEBA Gets Hit by the Stock Market Crash
In their report on the first year of operations of the VEBA, the trustees stated that financial crisis of 2008-2009 had a negative impact on the GM assets in the plan.
The report noted the following:
The value of the VEBA’s GM stock in the reorganized company was reduced due to the decline of stock’s prices since the November 2009 IPO. In 2010, the VEBA held 17.5% of common stock in the new GM and 68% of Fiat Chrysler stock.
The original investments of the VEBA, which were set aside on January 1, 2008, were made in stocks and bonds that suffered significant losses by the time they were turned over to the VEBA on January 1, 2010.
The companies implemented major early-retirement programs that created additional liabilities for the VEBA.
Investment markets had a difficult year in 2011 that had a negative impact on the value of VEBA investments. Investments returned −0.7% in 2011.
The trustees noted that the investment environment was much different from that of 2007 when the trust’s future investment earning potential was first estimated. Consequently, the expected long-term rate of return for the plan is lower today, at 7%, than the originally projected 9%.
These factors were having a negative impact on the current value of investments, as well as on their future earnings potential. Steps were taken to address these challenges including changes to the prescription drug programs to increase use of generic drugs and less expensive brand drugs, and increases in deductibles and copays on medical benefits, especially out-of-network services. 13
2011—A Lifeline Is Extended
In 2011, negotiations between the UAW and GM resulted in a contract provision to increase funding of the VEBA. Ten percent of active employees’ profit-sharing payments would be diverted each year to help fund the VEBA. In 2012, it would have amounted to an estimated $37 million payment to the VEBA. When the VEBA was established, it was with the understanding that the union or its members would not seek any new increase of funding or payment by the companies beyond the initial contributions made to establish the plan. 14
Current Status
A comparison of key plan metrics, in the first (2010) 15 and most recently available (2014) 16 plan years in the VEBA’s history, is shown in Figure 3.

Comparison of Key VEBA Metrics: 2010 Versus 2014.
The comparison shows the following:
The population serviced by the VEBA has declined by 12%, which should help in conserving plan assets.
Although the enrolled population has decreased and the health care inflation rate has declined in recent years,17,18 the amount spent on benefits has stayed about the same. This could indicate that participants are requiring more and/or higher levels of care.
Assets in the plan are not being depleted at a rapid rate.
The cumulative rate of return on investments of 7.9% is above the expected rate of 7%.
Recent reports show that the discount rates and actuarial assumptions used by the plan have been too aggressive. More conservative assumptions result in significant funding gaps in the future. 19
Other developments were the following:
Dental and vision benefits were fully restored in 2015.
Funding methods were established (e.g., a portion of the profit sharing payments of active employees) that presumably could be expanded if necessary.
The auto companies are expanding their workforces and the incentivized early retirement programs covering the more costly medical benefits of pre-Medicare retirees have ceased. New hires are not eligible to participate in the VEBA.
As time passes, the burden of costly early retirees health care benefits will lessen as they become eligible for Medicare benefits at age 65. There are at least 100,000 pre-Medicare retirees in the plan, and they could logically be required to contribute more for their coverage than Medicare-eligible members, if necessary, to maintain plan funding levels.
Benefits appear to be delivered at a satisfactory level to participants. A total of 294,000 phone calls were handed in 2014.
At this point in time, the VEBA appears to have been a smart move to protect the health care benefits of retired hourly employees. The road to get here has been filled with huge challenges that the parties overcame with some pain. There were legal challenges to its very existence, bankruptcies of the companies that provided funding and a severe recession that devalued its asset base. Retirees were asked for the first time to make health care contributions and to deal with higher deductibles, copays and reductions in covered benefits. Active employees made substantial sacrifices in pay to fund the plan. It now appears as though it has enough assets to continue to provide benefits for decades.
Nevertheless, major uncertainties exist. The performance of its investments depends largely on the financial markets. Questions have been raised about whether the plan has sufficient assets to pay benefits indefinitely, based on conservative actuarial assumptions and discount rates. Funding sources, such as active employees’ profit-sharing plan payments, depend on company profitability.
Although the VEBA was designed to protect retirees’ health care benefits, the protection is not assured and funding depends on several factors beyond the control of its managers. It has met monumental challenges in the past, which bodes well for its ability to respond effectively to forces that may test its resources.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
