Feb. 14 (Bloomberg) -- The United Auto Workers union is objecting to proposals from General Motors Corp. and Chrysler LLC to modify a retiree health-care fund as required by the U.S. so the automakers can keep $17.4 billion in aid.

The UAW stopped negotiations with GM last night, a person familiar with the talks said. Chrysler still is talking to the union, though the talks haven’t been substantive, said another person briefed on those discussions. A delay in the talks could risk the automakers missing a Feb. 17 deadline to show progress in a government-ordered plan to cut labor and debt costs. It’s not clear what that would mean.

The GM and Chrysler proposals on the Voluntary Employee Beneficiary Association “contradict the explicit terms of the Treasury loan agreements, and would severely hurt retirees,” UAW legislative affairs director Alan Reuther said in an e-mail last night. “These proposals are a non-starter as far as the UAW is concerned.”

The terms of the Dec. 19 loan agreements from the U.S. Treasury require GM and Chrysler to convince the UAW to accept half of scheduled payments into a union-run retiree health-care fund next year in equity instead of cash. The automakers are also seeking to eliminate supplement unemployment pay and change plant work rules to trim labor expenses.

In GM’s case, the union must sign off on a cash contribution of $10.2 billion to the VEBA instead of $20.4 billion, GM said Jan. 15. The UAW already agreed to accept reduced cash payments into the health-care fund, which was established under the 2007 contract that let automakers pay new workers half as much as traditional union employees.

80-Year Fund

UAW President Ron Gettelfinger said in 2007 that the union was confident the VEBA could pay the health-care benefits of retirees for the next 80 years. He’s said he’s willing to make additional sacrifices to help the automakers avoid bankruptcy if auto executives, debt holders and others also sacrifice.

“We are committed to meeting the terms of the bridge loan and submitting a restructuring plan on Feb. 17,” GM spokesman Tony Sapienza said, without commenting on specific bargaining proposals. “We will continue to engage our union partners in discussions around labor issues that will be a part of that plan.”

Chrysler, owned by Cerberus Capital Management LP, said it also plans to meet the government deadline.

“We continue to engage all of our stakeholder groups as we work through this process,” Chrysler spokeswoman Shawn Morgan said. She declined to otherwise comment on the negotiations.

Unemployment Provision

The automakers are also asking the union to end a 54-year- old benefit that ensures almost full pay during layoffs.

The so-called “supplemental unemployment benefit,” or “SUB” pay, gives laid-off workers most of their take-home wages. Automakers and the UAW are discussing the future of the program, said people familiar with the talks, who asked not to be named because the negotiations are private. The UAW isn’t negotiating cuts in core wages or benefits, the people said.

Lacking that cushion, older union members may retire and make way for new hires who are paid half as much, people familiar with the bargaining strategy said. Members of Congress who opposed an auto bailout criticized the benefits, and the U.S. Treasury loans require the automakers to stop all but “customary severance pay” to laid-off employees.

GM and Chrysler are offering buyouts for most of their 91,000 UAW workers.

“This would really be unwinding five decades of gains and that would be very, very tough for the union,” said Harley Shaiken, labor-relations professor at University of California in Berkeley. “It was part of Walter Reuther’s dream to have the person on the line treated the same as the white-collar worker,” he said, referring to the longtime UAW president.

Benefits Debated

The automakers in the last two weeks eliminated the so- called jobs bank, a 25-year-old program that paid UAW employees their full salary to report to work with no duties to perform, which was also criticized by Congressional Republicans last year.

SUB pay gives laid-off workers as much as 95 percent of net pay. For example, a UAW assembly-plant worker takes home about $855 after taxes. If that worker were laid off in Michigan, he would receive about $782, made up of $362 in state unemployment benefits and $420 in company-paid SUB pay, according to union documents and estimates prepared by automakers.

‘Critically Important’

“When workers are on layoff, this is critically important in enabling people to pay their mortgage, put food on the table and pay their heating bills,” said Alan Reuther, a nephew of Walter Reuther, who won the benefit at the bargaining table in 1955.

Ford Motor Co., the only U.S. automaker to forego federal aid, has said it expects to receive whatever concessions the UAW grants GM and Chrysler. Ford negotiators weren’t involved in talks at the union’s Detroit headquarters yesterday, said a source familiar with the situation. Ford spokesman Mark Truby declined to comment.

Advisers to GM’s debt holders are also in discussions to reduce $27.5 billion in unsecured debt to about $9.2 billion by swapping for equity, said two people close to the talks.

If GM and Chrysler can’t persuade the UAW and bondholders to agree to new terms, the government could force the automakers to return the loans or convert them into funding for a government-backed bankruptcy. GM Chief Executive Officer Rick Wagoner told Congress in November that Chapter 11 would lead to liquidation because shoppers won’t buy from a bankrupt automaker.

To contact the reporters on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net; Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net.

Last Updated: February 14, 2009 18:50 EST