Supreme Court says health benefits don’t ‘vest’

For some time, there has been a question about whether health benefits “vest” under a collective bargaining agreement. Since neither ERISA nor the National Labor Relations Act actually requires employers to provide health care benefits, employees typically bargain for health benefits that are then memorialized in a collective bargaining agreement.  

Over the course of time, employers have trouble dealing with this potential obligation to provide retiree medical benefits, and as with most disputes, it ended up in litigation. Now the Supreme Court has ruled on the issue.

In M&G Polymers USA v. Tackett, the Supreme Court considered a case that directly questioned the obligation to provide retiree medical benefits established through a collective bargaining agreement. In sum, the retirees were arguing that the right to receive the medical benefits was “vested” as of the date of their retirement, particularly where the collective bargaining agreement made no mention of the duration of these benefits and provided no provision for their termination.  

A unanimous court, which is rare in and of itself, disagreed with the lower court opinion that silence in a collective bargaining agreement regarding the duration of bargained-for retiree health care benefits should be construed as evidence of the parties’ intention that those benefits vest and continue indefinitely. Instead, the court determined that ordinary contract law principles should apply.

Also see: SCOTUS ruling in retiree health benefits case called ‘cautionary tale’

The general rule in interpreting contracts is that the court has to look to the intention of the parties to resolve ambiguities. Instead of applying contract principles, the lower court applied a standard that presumed that unless there was evidence to the contrary, the provisions of a collective bargaining agreement providing for retiree medical intended to grant those benefits for life. This concept, developed under a case called Yard-Man, had acted as the basis for the proposition that retiree medical benefits vest unless otherwise specified.  

The Supreme Court’s primary concern was that this presumption improperly places “a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” It presumes intent rather than requiring a determination of the actual intent.

Welfare benefits exempt from vesting requirements

It should be noted that the Supreme Court has a fairly long history of determining that welfare benefits, including retiree medical care benefits, are exempted from ERISA’s vesting requirements. Correspondingly, this is why many plans include provisions that preserve the right to amend or terminate so that there is no implication that they can never be changed.  

So while this case deals primarily with collectively bargained obligations, it should also serve as a reminder to plan sponsors to include those provisions in their plan documents so they have that discretionary authority. As for this case, it provides a not-so-subtle warning to employers engaged in collective bargaining that while silence does not presume vesting, the intent of the parties in bargaining may ultimately become an issue that has to be proven with actual evidence. 

So the take away from this case may actually be more than just an elimination of the Yard-Man presumption. It may be that it is a reminder to employers that engage in collective bargaining to not assume silence in an agreement has any particular meaning.  

You may ultimately have to prove intent, particularly when it comes to benefit issues. Intent is easier to prove when it is specifically spelled out in actual contract terms.  

Therefore, it could be that the best way to preserve the right to change or eliminate benefits — or terminate retiree medical — is to specifically include that right in the agreement. Sure, it might cause an issue at bargaining, but it may end up avoiding future problems where “proving intent” becomes an issue. 

Keith R. McMurdy is a partner with Fox Rothschild focusing on labor and employment issues; he can be reached at kmcmurdy@foxrothschild.com or (212) 878-7919.

The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.