Auto Workers’ Medical Benefits at Risk Under New Tax

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UAW, Big Three must decide who will pick up tab for tax on high cost health plans

Detroit’s negotiations this summer to reach a new four-year labor deal won’t just be an argument about wages. Generous health-care benefits for about 135,000 unionized factory workers are at risk of being cut to prepare for the Affordable Care Act’s “Cadillac” tax.

Health care has long been a fiercely protected benefit for United Auto Worker members, remaining generous even as the union has made other concessions. But the so-called Cadillac tax on companies with high-cost health plans is scheduled to take effect in 2018.

The law imposes a 40% excise tax on the annual cost of health care above $10,200 for individual coverage and $27,500 for family coverage. It is unclear how many UAW assembly workers have plans with costs exceeding those amounts, but industry officials say penalties could be significant.

The tax was created to help fund the health-care law, as well as discourage overly generous medical coverage that provided an unequal tax benefit and that could encourage overuse of health care. A Mercer LLC study conducted in 2014 estimated about one-third of employers in the U.S. say they will be hit with the tax in 2018 if no changes are made.

Unions and employers have been tussling over who will pick up the tab for new mandates, and it promises to be a point of tension as thousands of labor contracts are renegotiated over the next couple of years. A key question is who will shoulder new costs associated with the ACA.

Negotiators for the Big Three auto makers are willing to be creative in lowering expenses, including potentially forming a shared private exchange that would let the companies better leverage their size to win lower costs, according to people familiar with the plan.

Health benefits were among the topics discussed at the union’s quadrennial bargaining convention in Detroit Tuesday. UAW President Dennis Williams said it is premature to comment on benefits and other issues on the negotiating agenda.

Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles will spend in excess of $2 billion in medical cost coverage for hourly workers in 2015, or at least $14,800 per active worker, according to figures furnished by the auto makers.

To contain annual costs, which are equivalent to what it would cost to develop a couple of new cars or trucks, they may need to roll back benefits and increase cost sharing.

UAW members pay between 6% and 8% of their medical costs—far less than what is typical for manufacturing employees. Chrysler estimates it is conceivable hourly worker medical costs will eventually exceed the equivalent of $16 an hour, or more than the entry-level wage, if they go unchecked.

The car makers in 2007 moved tens of billions of dollars in retiree obligations off their balance sheets into VEBA accounts, which work as independent trust funds managing money needed to pay future medical bills. The threat of getting slapped by the Cadillac tax is a big factor in bringing them back to the table on the issue.

The auto makers say medical costs must be addressed—which means a fight is almost certain.

Mr. Williams is also dealing with discontent among members related to the roughly $9 gap between veteran factory workers and new hires. Altering a tiered wage structure is a top priority.

“This is a line in the sand for the UAW,” Kristin Dziczek, a labor expert with the Center for Automotive Research, said. “The companies have done well over the past four years, so to go in and say ‘we [workers] have to take on health care cuts’ is going to be a hard sell.”

The UAW’s single-digit percentage share for medical costs is far below the 30% cost-share standard among Detroit’s salaried workers. Truven Health Analytics estimates average cost shares for U.S. manufacturing workers is closer to 28%.

GM and Ford still carry a labor-cost disadvantage compared with nonunionized auto makers building cars in the U.S. Fiat Chrysler, while aligned with most nonunionized rivals on costs, has said it has no interest in returning to the days when it was uncompetitive in that area.

“The financial penalties associated with the Cadillac tax are significant and represent an incremental cost to the already high cost of employee health care,” Fiat Chrysler Automobiles (FCA) said. “Failure to address the rate of heath-care inflation will cause FCA to reach the Cadillac tax threshold quicker.”

FCA estimates it will spend $611 million on health care in 2015 for UAW workers covered by the collective-bargaining contract. Ford in 2014 spent $700 million on the benefit, roughly equal to GM’s costs.

The tab will grow. Ford, for instance, says the cost has grown 15% since the last contract was signed in 2011, and expenses will increase 25% by 2019. Fiat Chrysler says it pegs its annual inflation at 8% and says medical costs are unsustainable.

—Melanie Trottman contributed to this article.


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