On Second Thought: Modifying Retiree Health Plans - No Good Deed Goes Unpunished

Originally published September 3, 2002

"But you promised!" is a refrain heard by parents of toddlers and teenagers. Like these parents, employers too are often puzzled as to when, how, and the extent to which they have made certain promises to employees. These implied promises can be expensive and disruptive when they involve employee benefits, particularly retiree medical benefits allegedly promised on a "permanent" basis to former employees and retirees. This article reviews recent cases discussing such implied promises and suggests ways employers can limit their scope.

Background

Employers first began to explore possibilities for altering retiree benefits in the 1980s, when a combination of factors converged to focus attention on the issue. First, the Financial Accounting Standards Board (FASB) issued Financial Accounting Statement 106 (FAS 106), which required corporations to reflect the value of future retiree medical liabilities on their financial statements. This in turn caused employers to evaluate seriously the scope and extent of their retiree health programs, and whether such programs could be sustained in the future. As health care costs rose dramatically, and employers began to examine the demographics of their workforce, many recognized that if left unchecked, retiree medical obligations could soon surpass benefit program costs for active employees.

Many employers addressed rising health care costs by restricting or eliminating retiree medical benefits for future retirees. However, as retiree costs continued to grow, and as retirees began to constitute a larger and more expensive portion of total healthcare costs of all active and retired employees, employers have also attempted to manage health care costs of current retirees. This was particularly the case as employers began to introduce managed care programs for active employees.

Vesting Concepts

In sharp contrast to the laws governing qualified pension plans, there are generally no statutory rules requiring that participants in health plans have vested or nonforfeitable rights, although "qualification" requirements applicable to funding vehicles such as voluntary employees' beneficiary associations (VEBAs), Section 420 pension accounts, and cafeteria plans impose some limitations in that regard. Moreover, with the exception of limited rules governing insured plans and certain aspects of multiple employer welfare arrangements (MEWAs), the Employee Retirement Income Security Act (ERISA) preempts any state law regulation of these benefits.

Initially, some courts attempted to advance a theory that retiree medical benefits vest as a common law right upon retirement, but this principle has generally not been adopted unless other significant factors are present. In Hansen v. White Farm Equip. Co. , 5 Employee Benefits Cas.(BNA) 2130 (N.D. Ohio 1984), rev'd, 788 F.2d 1186 (6th Cir. 1986), the District Court held that "the modern view" was that an employer may not terminate the benefits of a retired employee as a matter of federal common law. This decision was reversed, but the Sixth Circuit was careful to preserve its view that although retiree status itself does not create full vesting, a presumption in favor of benefit continuation as long as the affected individual is a retiree should be inferred in an analysis of these issues. In part, these cases emphasized the relative economic powerlessness of retirees once they retired. Courts that adopt this approach often color their interpretation of the facts of the case with the weight of this inference.

Other cases have continued to recognize that ERISA does not require automatic vesting of health and welfare plans, and seek more concrete proof of a promise to vest benefits. For example, in Sprague v. General Motors Corp., 133 F.3d 388, 400 (6 th Cir. 1998), the Sixth Circuit, after observing that ERISA does not require vesting of welfare plans, stated that "an employer's commitment to vest such benefits is not to be inferred lightly; the intent to vest must be found in plan documents and must be stated in clear and express language."

Although ERISA does not require vesting of welfare benefits, it does require that employers state with some precision in their plan documents the scope of benefits to be provided under the plan. Every ERISA plan must specify a funding mechanism, allocate operational and administrative responsibilities, and state how payments are to be made to and from the plan. Courts and plaintiffs have emphasized these requirements and argued that where the plan documents are ambiguous, promises of lifetime benefits to retirees can be inferred. These "lifetime promises", particularly if written but even if oral, can only be contradicted or amended if the plan document is properly drafted. As discussed below, courts continue to struggle with the issues of the scope of plan documents and whether the language contained in such documents is in fact ambiguous.

Reservation of Rights Clauses

Plan sponsors stand a better...