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LIFETIME MEDICAL BENEFITS: CAN THEY BE CHANGED AFTER RETIREMENT?
Many cases have been filed through the years by retired employees claiming that medical benefits, which they thought had been promised for life, were cancelled or modified after they retired. A recent opinion by the Sixth Circuit Court of Appeals holds that the promise to pay medical benefits for life did not prevent the employer from modifying the benefits in effect when the plaintiffs retired. Reese v. CHN America, 2009 WL 2213465 (6th Cir. July 27, 2009).
This case involved medical benefits negotiated in a UAW collective bargaining agreement which said that “employees who retire [after specified dates] …shall be eligible for the Group benefits as described in the following paragraphs.” The agreement did not spell out what benefits were included but did say that retirees would not have to make contributions for medical benefits.
The first issue was whether the employer had the right to terminate medical benefits for retirees. The court noted that unlike pension benefits, which were protected by ERISA, medical benefits were strictly a matter of contract. Interpreting the labor agreement, the court found that the right to medical coverage was vested for life because, among other things, eligibility for medical benefits was tied to pension eligibility and the contract contained no provision limiting the duration of those benefits.
The court then addressed the issue of whether the right to health coverage for life prevents alteration of the benefits after retirement. The court drew an interesting distinction when it said that promises to pay retirement benefits would be assessed differently than promises to pay medical benefits because “…while ERISA heavily regulates promises to pay pension benefits, health benefits are purely a matter of contract—permitting a company to guarantee health benefits for life or make them changeable, or even terminable, at the will of the employer.”
Interpreting the contract, the court noted that health benefits language did not contain the precision that characterizes a pension plan but stated in substance that employees who retire will be eligible for health-care benefits…as provided for in the labor agreements in effect at the time of their …retirement.” Plaintiffs argued that this language guaranteed that the health benefits in effect at retirement would continue for life but the court disagreed. It noted that the contracting parties had themselves changed health benefits up and/or down in various contract negotiations and had even, under this language, changed health benefits for retirees in prior agreements. The court concluded that the claim that health benefits “must be maintained precisely at the level supported by the 1998 [labor agreement]…is not supported by the 1998 [agreement], extrinsic evidence…or common sense.” The court then remanded the case to the district court to determine “how and under what circumstances [the employer] may alter such benefits.” This remand provides little guidance to the district court and it will be interesting to see how the court interprets this mandate.
The bottom line for employers is to understand that a guarantee of lifetime medical benefits may not prevent an employer from altering those benefits after an employee retires.
