Skip to Main Content
Publications | March 24, 2015
5 minute read

Supreme Court Repudiates Case Law on Retiree Health Care – What Should Employers Do?

Recently, the U.S. Supreme Court unanimously repudiated 30 years of case law from the U.S. Court of Appeals for the Sixth Circuit, which inferred lifetime vesting of retiree healthcare benefits under collective bargaining agreements that do not specify vesting or the intended duration of the benefits.

The majority opinion in M&G Polymers USA, LLC v. Tackett voided any presumption in favor of vesting. In fact, the majority stated there is a presumption against vesting if the agreement is silent on the issue and that neither vesting nor a lifetime promise of benefits is to be inferred from contractual silence on these issues. Unfortunately, the minority concurring opinion left the door open to further litigation, as those four justices would allow review of “extrinsic evidence” to determine whether the parties intended that benefits be vested or continued for life.

In the past, employers have avoided modifying or eliminating these benefits due to fear of protracted and expensive litigation. The inability to modify these benefits has, given accounting standards, also impacted employers’ financial statements. Given the more favorable environment for changes or elimination of legacy retiree health care benefits, here are some practical strategies employers can use to eliminate vesting and control the duration and cost of retiree health care benefits.

Plan Document/Summary Plan Description

ERISA explicitly omits any requirement for vesting of healthcare benefits. Employers should first look to their plan documents and summary plan descriptions. Provisions should be adopted or modified to expressly disclaim vesting of retiree health care benefits and to allow the employer to amend or terminate the plan at any time.

Collective Bargaining Strategies

For existing retirees, the attempt to negotiate limitations on retiree benefits in the context of a collective bargaining agreement is difficult at best. First, the union does not technically represent the retirees and may not negotiate changes in retiree benefits, except as to those retirees who affirmatively consent. Second, the union is often reluctant to negotiate modifications for fear that it will be a defendant in a lawsuit instituted by disgruntled retirees. Last, these benefits are not a mandatory subject of bargaining and become a subject of bargaining only if both sides agree to discuss these issues.

The result is different with respect to active employees/future retirees. Given the strengthened legal position arising from the M&G opinion, employers should seek to negotiate the following provisions in bargaining agreements:

  • Retiree health benefits do not vest;
  • Retiree health benefits continue only during the term of the bargaining agreement or for some other specified period;
  • Subject only to the terms of the current bargaining agreement and its duration, the employer is free to amend or modify the retiree health care provisions; and
  • The bargaining agreement incorporates by reference an independent plan document providing that benefits do not vest and that the employer, subject only to the terms of the bargaining agreement, is free to amend or terminate retiree benefits.

Settlement Strategies

Employers wishing to modify healthcare benefits for existing retirees would be wise, in light of the continuing risk of litigation, to negotiate with the retiree group – with or without the involvement of the union. With the recent changes in the law, retiree groups may well be responsive to substantial modifications in the benefit structures, such as first time or increased retiree contributions toward the costs, increased co-pays or deductibles or tying the benefits to those provided to active employees.

Some large employers have sought to make changes through non-opt out class action litigation and a settlement in response to the action which binds all affected parties. For example, one Michigan automotive supplier is currently employing a variant of this strategy in its current litigation involving another supplier and the United Steelworkers.

Another strategy is to approach retirees with an offer to establish and contribute to a VEBA, or voluntary employee beneficiary association IRC 501(c)(9) tax exempt entity. A VEBA is designed to provide funds for the increasing costs to retirees or to entirely fund retiree benefits after a certain date. This entity can also be governed entirely by elected retirees, giving the retirees a direct stake in prudently managing health benefit strategies and controlling costs to assure the longest feasible continuation of retiree benefits.

HRA for Future Retirees Only

Whether employers wish to make some provision for or the employees seek retiree healthcare, a retiree-only Health Reimbursement Account (HRA) is a very flexible way to make provisions for these benefits. An individual account is created for each potential retiree. Contributions or credits can be discretionary and can be tiered based on age and service. The plan can be unfunded, consisting only of accounting credits until actual claims for reimbursement are submitted. Even if funding is desired, it can be accomplished through a VEBA. The total accumulation in the account balance can be capped – often at a multiple of annual contributions and retiree-only HRAs are not subject to the Affordable Care Act prohibition on capped lifetime benefits.

Since a retiree-only HRA is an account balance plan, the costs are not subject to medical inflation or adjustment by third parties. Benefits can be limited to employees who terminate employment only after a given age, number of years of service, or a combination of these factors. The individuals’ accounts may be limited to payments of medical care premiums, but also may be used to pay any other qualifying medical expense. The plan should provide that benefits are not vested and the plan may be amended or terminated at any time (except, in fairness, as to claims incurred before the date of the modification).

Thankfully, the Sixth Circuit Court of Appeals can no longer be the outlier on the issue of the vesting or modification of retiree health benefits – the cloud on employer actions in this sphere has been lifted. Employers, particularly those in Michigan, Ohio, Kentucky and Tennessee should carefully consider and implement strategies to place reasonable restrictions on these benefits.