Under its plan, the company would use assets now held in a voluntary employee beneficiary association to purchase medical stop-loss policies from Prudential Insurance Co. of America, which would pay claims over the expected lifetimes of about 4,000 retirees and dependents. Coca-Cola established the VEBA in 2006 and contributed $216 million to the trust.
The medical stop-loss coverage would pay claims that fall between a $100 attachment point and an upper limit. For those retirees younger than 65, the upper limit would be $5,800; for retirees 65 or older, it would be $3,500.
Prudential, in turn, would use the premium it receives from Coca-Cola to reinsure the risk with Red Re Inc., Coca-Cola’s South Carolina captive insurer, and one of three Coca-Cola captives. Coca-Cola now uses Red Re for a wide range of risks, including benefit coverages of employees outside the United States.
But the Labor Department said last month that on the basis of the facts provided, it has tentatively decided not to approve the transaction.
To demonstrate that it meets the criteria for approval—legally known as a prohibited transaction exemption—the Labor Department, in its ruling, suggested that Coca-Cola still needs to address several issues.
Among other things, the Labor Department wants Coca-Cola to provide more information about how the arrangement would enhance retirees’ benefits and whether Coca-Cola asked insurers other than Prudential whether a non-cancelable medical stop-loss policy would be available.
Laurie R. Solomon, Coca-Cola’s director of risk management in Atlanta, said the company will continue to work with the Labor Department to win approval of its proposal.
Benefits experts earlier said that should Coca-Cola win approval for its proposal, other employers likely would follow.
Under federal law, assets contributed to a VEBA must be used to pay benefits or purchase insurance policies that provide benefits. Employers cannot remove VEBA assets for other purposes, even when a benefit program is being wound down.
By contrast, using a captive to fund benefits gives a company greater financial flexibility. For example, investment gains on contributions made to the captive can be paid out as dividends to the parent.
In addition, because the Internal Revenue Service considers employee benefit risks to be third-party business, funneling benefit programs through a captive could increase the likelihood that an employer can deduct property/casualty premiums paid to its captive.