Changing Retiree Medical Benefits May Violate U.S. Benefits Law
Do you think you reserved the right to amend your U.S. retiree medical benefits? Think again.
Most U.S. federal court decisions have found that retiree medical benefits did not vest on retirement. Rather, employers had the right to modify non-union post-retirement medical coverage if they had reserved this right in the plan’s summary plan description (SPD) (which is the basic plan disclosure all participants receive).
For example, in a case involving the retirees of John Deere & Co. (PDF), a federal district court held that John Deere did not violate the U.S. Employee Retirement Income Security Act of 1974 (ERISA) when it imposed significantly higher deductibles and co-pays on retirees, and removed a cap on out-of-pocket expenses, because John Deere had unambiguously reserved the right to amend the plan.
However, a recent federal appeals court decision involving Unisys Corporation (PDF) suggests that employers must follow specific rules in order to implement cuts to retiree coverage. Unisys was ordered to reinstate its plan without the right to alter benefits for the following reasons:
- Although the Unisys SPD reserved the right to amend or terminate the plan in the future, the SPD was not distributed until after employees had retired and enrolled in the plan.
- Employees who were about to retire were told that after age 65, they would not have to contribute towards benefits, and were not advised at that time of the reservation of rights.
Timing is apparently everything, at least for employers in the 3rd Circuit.
Employers with U.S. plans should also be aware that the health reform bill passed by the House of Representatives (PDF) contains a provision (Section 110) which would make it extremely difficult to change retiree coverage regardless of the communications retirees have received. This provision would prevent reductions in retiree benefits unless comparable reductions were made in the coverage of active employees. Thus, any employer contemplating changes in retiree coverage should also keep an eye on the status of health care reform legislation.
