More Retirees May See Health Cuts

Some large employers will have greater flexibility in how they cut retiree health-care costs starting Jan. 1, thanks to a provision in the new corporate-tax bill. And the change could affect health benefits for more retirees.

Lucent Technologies Inc., which has been cutting some retirees for whom it pays health-care costs, lobbied forcefully for the change in the law -- though it will affect other companies as well. The sweeping tax bill cleared the Senate this week and is expected to be signed into law by President Bush.

The law applies to large companies that withdraw surplus pension assets to cover medical costs for retirees. That has been allowed since 1990.

However, there have been some restrictions. Under current rules, companies can't make significant reductions in retiree health benefits for five years after a transfer. Employers must maintain the same "per-capita cost" for five years, meaning they must spend the same amount per retiree.

To provide flexibility, however, they are permitted to cut the number of retirees they cover -- by 10% in any one year, or 20% over five years. That has the effect of reducing costs by 10% to 20%. (Employers are allowed to pass cost increases onto retirees).

Under the new rules, employers will not necessarily have to maintain the per-capita cost. Instead, they will be allowed to cut overall benefit costs for all retirees -- by the same amount they would have saved by cutting some covered retirees altogether. In other words, they now have the option to cut their costs for all instead of cutting some people.

Lucent, the Murray Hill, N.J., telecommunications-equipment maker, has argued that it has been forced to end coverage for some retirees to maintain the required per-capita spending. Since last year, the company, which withdrew a total of $1.2 billion from its pension plan to cover retiree health benefits between 1999 and the end of 2002, has made a series of cuts targeted to specific retiree populations.

It says the new rule will allow it to spread the brunt of cuts among more people, minimizing the impact on any specific group.

Last month, Lucent eliminated benefits for 10% of covered retirees and dependents, saying the move will save it about $16 million a year starting in 2005. At the time, Lucent said it made the eliminations because Congress hadn't passed the legislation it was seeking.

Asked whether Lucent will reverse its cut now, a spokesman said, "The new provision comes too late for us to change that decision."

Asked whether the company plans to make additional benefits cuts, the spokesman said, in a statement, "Once this law goes into effect, on Jan. 1, 2005, we will not have to make such difficult choices about who receives coverage. Rather, we will be able to distribute the increased costs of health care across the entire management retiree population."

He added that the new provision could apply to union-represented retirees going forward.

Members of the Lucent Retirees Organization, in an e-mail to lawmakers, said, "It is simply unfair to allow companies who have already received the tax and other financial benefits of the pension asset transfers to renege on their commitment to maintain retiree benefits -- a commitment which was a condition of the initial transfer."

It isn't clear how many companies will be affected by the new law.

In recent years, companies have made significant withdrawals from their pension funds. DuPont Co., for instance, withdrew more than $1 billion from its U.S. pension plans for retiree medical costs between 1997 and 2000. SBC Communications Inc. withdrew $286 million from pension-plan assets in 2001 to pay for retiree health costs. Other companies that have transferred assets from pension plans in recent years include, in 2001, Allegheny Technologies Inc., which withdrew $35 million, and Qwest Communications International Inc., which withdrew $98 million; and in 2002, U.S. Steel Corp. and Marathon Oil Corp., both of which transferred $18 million.

Fewer companies have been transferring pension surpluses recently, because many have already spent down surpluses on retiree health bills and for other purposes.

Write to Ellen E. Schultz at ellen.schultz@wsj.com