Sixth Circuit rules that an employer can modify or terminate "vested" retiree medical benefits

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Apparently, a leopard can change its spots.

In a ruling issued on February 8, 2016, the Sixth Circuit Court of Appeals, reversing a lower District Court ruling, held that retiree medical obligations provided under a collective-bargaining agreement (a “CBA”) did not irrevocably vest upon a covered-employee’s retirement. The Court of Appeals in Gallo, et. al. v. Moen, determined that the company could revise its post-retirement plan following the termination of the applicable CBA. Previously, the District Court, applying the “Yard-Man presumption”, held that such retiree medical benefits were vested upon the employee’s retirement and did not expire upon the termination or later modification of the CBA. Finding such, the District Court determined the benefits were vested for the life of such retirees and, therefore, could not be modified or terminated.

The Yard-Man presumption has been the bane of many employers with union-covered participants employed within the jurisdiction of the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee). Yard-Man applied a presumption that collectively-bargained retiree medical benefits were, absent clear evidence to the contrary, intended to vest upon retirement. This effectively placed a burden on an employer to prove that such vesting was not intended. As a result of this burden, collectively-bargained retirees in the Sixth Circuit were significantly more protected with respect to their retiree health obligations than their non-union contemporaries.

The Moen court’s ruling follows the recent decision by the United States Supreme Court in M&G Polymers USA, LLC v. Tackett. In that case, the Supreme Court overruled the Yard-Man presumption that “plac[ed] a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” Instead, the Supreme Court decision directed courts to interpret collective-bargaining agreements “according to ordinary principles of contract law” and to consider the general durational clauses in the CBAs (usually three years) in deciding how long a company has committed to provide healthcare benefits to its retirees.

In reversing the District Court’s granting of summary judgement in favor of the retirees, the Sixth Circuit Court of Appeals found that the former Moen CBAs did not evidence a commitment to provide health care benefits for the life of the retirees. The Court reviewed the language in the applicable CBAs and determined that despite the uses of the phrases “continued” and “will be covered” and “will be provided,” the CBAs did not indicate an intention to vest their retiree medical benefits for the life of the participants.

As time has passed, it has become more and more expensive for companies to provide health care for its employees. Companies are continually changing their health plans to manage these rising costs. These changes include moving to high deductible plans, raising co-payments, and implementing other managed care strategies in an effort to shift costs to the covered employees and to motivate the participants to be smarter consumers of healthcare services.

This has been particularly true with respect to health care benefits for retirees. Over the past 20+ years since the passage of FAS 106 (the accounting standard that required companies to accrue on their books the value of their retiree medical obligations), more and more employers have either terminated their retiree coverage or have significantly curtailed such coverage in order to control the spiraling rises in the cost of providing such coverage. However, for companies with covered CBA retirees in the Sixth Circuit, this has been a very difficult thing to accomplish as a result of the Yard-Man holding. The Sixth Circuit ruling in Moen clearly signifies that this is no longer the case for retiree health benefits due to collective-bargaining retirees that were employed in Ohio, Kentucky, Tennessee, or Michigan.

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