U.S. Supreme Court Directs Lower Court to Revisit M&G Polymers Case Terminating Free Retiree Health Benefits
By Mark Johnson, Ph.D., J.D.
In a unanimous decision, the U.S. Supreme Court appears to have sided with a chemical company in a case where union retirees were fighting to keep their health benefits. By their ruling, the justices reversed an earlier appeals court decision which favored employees and said the benefits had vested for life.
The Supreme Court faulted ‘ambiguous provisions’ in this union contract and sent the case back to the original appeals court, directing it to use ordinary principles of contract interpretation to settle the matter.
The Supreme Court’s Decision
The case, M&G Polymers USA v. Tackett, No. 13-1010, stemmed from pensioned retirees who worked at an M&G Polymers plant in Apple Grove, W. Va. When parent company Mossi Ghisolfi Group in Italy sought to make retirees contribute to health care costs in 2006, several retirees and their dependents filed suit arguing their contracts from the 1990’s had promised free health care for life.
According to an article titled “Supreme Court Rules Against Union Retirees in Benefits Case” in the Wall Street Journal, the Sixth U.S. Circuit Court of Appeals in Cincinnati (which covers Michigan, Ohio and Tennessee) had found for the plaintiffs. It ruled that the company reneged on the contract, and said it was “unlikely that [the union] would agree” to such a deal “if the company could unilaterally change the level of contribution.”
Supreme Court Justices disagreed in an opinion written by Justice Clarence Thomas, who said, “Courts should not construe ambiguous writings to create lifetime promises,” adding that “retiree health care benefits are not a form of deferred compensation.”
In addition, Justice Thomas said the Employee Retirement Income Security Act of 1974 treats pensions, which must be funded and vested, more favorably than “welfare benefits,” such as retiree health care, which lack such requirements in order to give employers flexibility in designing such benefit plans, he said.
The decision speaks to issues that could apply nationwide. Absent specific federal labor policy, union contracts are to be interpreted according to “ordinary principles of contract law,” Justice Thomas wrote.
The WSJ reported that although the court’s four liberal justices concurred, they added a separate opinion suggesting the retirees still had a solid case even under their endorsed stricter standards.
The attorney for the retirees, Joseph Stuligross of the United Steelworkers Union, said he sees an opening to salvage the retiree health benefit, but according to Allyson Ho, who argued the case for M&G Polymers, “The Supreme Court’s decision sends a strong message that restores a level playing field in benefits litigation nationwide.”
Expect Benefits to Change
Many Baby Boomers on the verge of retirement are expecting to receive future medical benefits from their employers. The trend, however, indicates this isn’t necessarily going to be the case. Studies show the number of companies with 200 or more workers offering retiree health insurance fell from 66 percent in 1988 to 33 percent in 2005.
If a plan is sponsored by an employer or union (other than a government employer or public employee union, or non-profit employer), it is governed by ERISA. ERISA benefit plans typically contain a “reservation of rights” provision in both the Summary Plan Description (“SPD”) and the more technical official plan document, which allows the plan sponsor to change or terminate all or parts of the plan. Plan changes must be implemented and communicated in accordance with ERISA guidelines.
The severe under-funding of health care benefits adds to the likelihood of potential changes in many retiree health care plans. For example, when Detroit declared bankruptcy, the city had approximately $6 billion in unfunded retiree health care obligations promised to those city employees who retire before they become eligible for Medicare at age 65.
But Detroit is not alone. The Pew Charitable Trust estimated that the 30 largest American cities had over $100 billion in retiree health care deficits in 2013. This can partly be attributed to the fact that required financial reporting of retiree health care benefits is relatively new—less than 10 years old—and appears mostly in footnotes of financial statements of state and city governments. As a result, these governments could promise health care benefits without accountability.
Even now, there is no obligation for local governments to establish separate trusts with advance funding of such benefits, like they are required to do so for pension obligations. Currently, only seven states have set aside more than 20 percent of the assets needed to pay their future health care obligations to retirees.
As always, employers/plan sponsors and plan administrators should regularly review their plan documents (including collective bargaining agreements)—which are commonly documents through which plans are created—for consistency and to remove any contradictions or ambiguities. This review should also include reviewing the questions asked by plan participants, to see if there are recurring questions or themes which can be proactively addressed in the summary plan description, on the employee benefit website or in other employee benefit communications.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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