Can Employers Make Changes to Retiree Health Care Benefits?

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Richard Kennedy copyBy Richard Kennedy

Lifelong health care benefits were once commonly offered to retiring employees by their employers.  But dramatically increasing health care costs and a requirement that companies account for the cost of retiree health benefits on the corporate balance sheet led many companies to unilaterally modify or terminate retiree health benefits.

Predictably, retirees were upset about the unexpected changes to what they thought were lifetime health benefits, and many lawsuits followed, particularly where the benefits had been collectively bargained.  The decisions in such lawsuits are important for employers considering changing or terminating retiree health benefits.

Courts generally have held that an employer cannot unilaterally modify or terminate retiree health benefits if the benefits are “vested,” meaning that the employer has made a promise or agreement to pay for the benefits for the lifetime of the retirees.  For union employees, the promise or agreement is typically found in the collective bargaining agreement.

For non-union employees, the promise or agreement is found in the plan document, and in the absence of a plan document, a combination of plan descriptions and insurance policies and certificates.  If there is no promise or agreement to pay lifetime benefits, the company may unilaterally change or terminate benefits for retired employees.

Recently, the Sixth Circuit Court of Appeals, which covers Ohio, Michigan, Kentucky and Tennessee, held that even for vested retiree health benefits, the employer could unilaterally make “reasonable” modifications to the benefits unless the collective bargaining agreement says otherwise.

The Court directed that the reasonableness of the modifications be determined by whether:

  • The modified plan provides benefits “reasonably commensurate” with the old plan;
  • The proposed changes are “reasonable in light of changes in health care”; and
  • The modified benefits are “roughly consistent with the kinds of benefits provided to current employees.”

This was the second time the case was before the Court.   In 2009, the Court held that the collective bargaining agreements granted the retirees a vested right to lifetime health benefits that could not be terminated.  However, the 2009 Court also held that the agreements permitted the employer to make reasonable modifications to the benefits, and it returned the case to the district court to decide how and in what circumstance the employer could modify the benefits.

After the district court ruled on summary judgment that the employer could not modify the retiree health benefits, the case was appealed again to the Circuit Court.  The Circuit Court said the district court was wrong.  The Court emphasized that its 2009 holding meant that the employer can make unilateral changes to the vested retiree health benefits, provided the changes are reasonable.  The Court again returned the case to the district court with directions to take specific evidence on seven different factors to determine “reasonableness.”

The case introduces a new wrinkle to this issue by holding that employers can make unilateral modifications to vested retiree health benefits, if the modification are reasonable.  Before this case, it was generally accepted that vested retiree health benefits could not be unilaterally modified by an employer.

The impact of this case is yet to be seen.  There was a strong dissenting opinion that agreed with the district court that the level of vested health benefits cannot be unilaterally modified.   And even the majority opinion noted that the reasonableness inquiry for a modification is a “vexing one” because of the difficulty of evaluating and predicting future health care costs and benefits.

Despite this, the case may provide a method for employers to modify vested retiree health benefits to reflect the changing medical market and increasing costs.  Thus, for employers obligated to provide vested retiree health benefits, the case, Reese v. CNH America, is worth watching.

Richard Kennedy is an attorney with Pittsburgh-based Meyer, Unkovic & Scott and has extensive experience in all aspects of employee benefits law.  He can be reached at rtk@muslaw.com.