SUPREME COURT ALLOWS EMPLOYER TO REDUCE RETIREE HEALTHCARE BENEFITS

Written on May 13, 2016.

Many employers provide healthcare benefits not only for active employees, but also for retirees. While pension benefits are normally thought of as vested, by and large employers have a great degree of leeway to design health and welfare plans according to their own wishes. However, once the welfare plan is written, courts will enforce the terms of the plan.

As healthcare costs have significantly increased, many employers have required employees to begin contributing to the cost of their healthcare benefits. Some retirees, in turn, have argued that their healthcare costs cannot be increased but are instead "vested" at the time of their retirement. It appears that the resolution of this issue largely depends on the terms of the particular plan.

The Supreme Court addressed this issue in a case involving free healthcare benefits for retirees under an expired labor contract. M&G Polymers USA, LLC v. Tackett, 202 LRRM 3201 (Jan. 26, 2015). The lower court seemed to indicate that in the absence of intrinsic evidence to the contrary, provisions of the labor contract indicated an intent to vest retirees with lifetime benefits that could not be changed. The lower court noted the absence of a termination provision specifically addressing retiree benefits, and inferred from this situation an intent to vest those retiree benefits for life.

The Supreme Court reversed, finding that traditional principles of contract law applied to retiree plans, also applied to collective bargaining agreements. One of those traditional principles are that courts should not construe ambiguous writings to create lifetime promises. The Court cited the principle favorably that because vesting of welfare benefits is not required by law, an employer's commitment to vest such benefits is not to be inferred lightly; the intent to vest must be found in the plan documents and must be stated in clear and express language.

Editor's Note - The Supreme Court ruling will give employers more leeway to modify or reduce healthcare benefits provided to retired workers. However, this issue remains one of the interpretation of a contract, and the primary result of the case is that the courts must apply ordinary contract principles, without presumptions, to determine whether retiree healthcare benefits are vested.