Unlike Diamonds, You Cannot Presume Retiree Medical Benefits Are Forever

02 February 2015 Labor & Employment Law Perspectives Blog

Last week, the United States Supreme Court issued a decision that gives unionized employers in Michigan, Ohio, Tennessee, and Kentucky greater ability to modify medical benefits they provide to retirees pursuant to current and prior collective bargaining agreements. Employers in these states were previously subject to the unique case law from the United States Court of Appeals for the Sixth Circuit (covering the states mentioned above) that required courts to presume that retiree medical benefits offered pursuant to a labor contract were, like pension benefits, “vested,” i.e., locked in and unchangeable by the employer for the remainder of the retirees’ lives. But a decision by the Supreme Court this week overruled the Sixth Circuit law and evened the playing field for employers in the Sixth Circuit, making it easier for them to make changes to retiree medical benefits without violating the law.

In the same case, and prior to the Supreme Court’s review, the Sixth Circuit relied on its past precedent to conclude that the retiree health care benefits at issue were vested and, thus, not subject to change. In rejecting the Sixth Circuit’s line of cases, which applied a presumption in favor of vesting for retiree health care benefits, the Supreme Court concluded that such a presumption conflicts with ordinary principles of contract law. Instead of a presumption in favor of vesting, the Supreme Court determined that ordinary principles of contract law must be used to determine the intent of the parties. Such principles are violated by “placing a thumb on the scale in favor of vested retiree benefits in all collective bargaining agreements.”

The Supreme Court emphasized that the case was about the interpretation of collective bargaining agreements that define rights to welfare benefits plans. Such plans are subject to different treatment under the Employee Retirement Income Security Act (ERISA) than a pension plan. As the Supreme Court has previously noted, “[e]mployers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans.” Additionally, “employers have large leeway to design disability and other welfare plans as they see fit.” The rule that contractual provisions ordinarily should be enforced “as written” is especially appropriate when enforcing an ERISA welfare benefits plan.

The Sixth Circuit’s previous presumption of vesting ignored several principles of contract interpretation, including: 1) Courts should not construe ambiguous writings to create lifetime promises; 2) Before conferring a benefit or obligation, a clear manifestation of intent must be present; and 3) “Contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.” Additionally, the Supreme Court held, “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.”

While the Supreme Court’s ruling is good news for employers, the determination of whether benefits are vested (and, therefore, unchangeable) will likely depend on the specific language in the labor agreement at issue, and how such language reflects the intent of the parties. Any employer in Michigan, Ohio, Tennessee, or Kentucky that previously believed it would be too “risky” to make a change to its retiree benefits should now reassess that belief with the support of experienced legal counsel.

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