Appeals Court Limits Reach of "Vesting" of Retiree Health and Welfare Benefits
Since its 1983 decision in UAW v. Yard-Man, Inc., the 6th Circuit Court of Appeals, the federal appeals court which covers Michigan, has provided a very employee-friendly (or less charitably, employer-unfriendly) interpretation of ERISA. This relates to the protection of "vested" benefits under ERISA, which cannot be reduced or eliminated regardless of future events. This concept of non-forfeitability was, prior to Yard-Man, generally understood as applicable to employee pension benefits, in accordance with the explicit statutory language in ERISA, and not to health and welfare benefits. Yard-Man extended the concept of "vested" benefits to certain retiree health benefits established through collective bargaining, thereby preventing their reduction by subsequent plan changes after the employee had retired.
Other circuit courts around the United States have been generally unreceptive to this position, leaving the 6th Circuit as an outlier in this respect. In the recently decided Price v. Board of Trustees of Indiana Laborer's Pension Fund case, the 6th Circuit limited its prior holding in Yard-Man to "vested" health benefits, and found that other types of health and welfare benefits are not necessarily subject to the Yard-Man requirement, and can be reduced or eliminated, if plan language allows.
The Price case involved a disability benefit incident to a pension plan. Although the benefits were provided under a pension plan document, for ERISA purposes the disability benefits are considered to be health and welfare rather than pension benefits. Mr. Price was determined under standard plan procedures to be disabled and entitled to disability benefits under the Plan, and was advised that those benefits would continue until either the disability ceased or he reached early retirement age and became pension eligible. After paying the disability benefits for four years, the Trustees of the Plan, fearing insolvency, amended the Plan to place a two-year cap on disability benefits. This limit was interpreted as applying to Mr. Price and his disability benefits were terminated, even though he was still disabled and had not yet reached early retirement age. The District Court which originally heard the case found in Mr. Price's favor based on the Yard-Man doctrine, determining Mr. Price vested at the benefit levels when granted, and therefore the benefits could not be subsequently reduced or eliminated.
In a two-to-one decision, issued in January 2011, the 6th Circuit Court of Appeals disagreed and remanded the case back to the District Court for further proceedings. In so doing, it limited its earlier Yard-Man finding to retiree health benefits, and thereby making the doctrine inapplicable to the Disability Plan and presumably to other types of health and welfare benefits as well. Importantly, the Plan under which Mr. Price received his benefits explicitly provided the Trustees with discretion to amend the Plan and to interpret its language. Thus, the analysis was grounded in a reasonableness determination of fiduciary action as consistent (or inconsistent) with plan language, rather than a hard-and-fast rule that any benefits granted can never be changed or eliminated in the future (as in Yard-Man). In addition to limiting the extent of the vesting concepts for health and welfare plans in the 6th Circuit, the case highlights the importance of paying attention to the explicit terms of plan language before an employer agrees to participate. If the plan document had not contained the discretionary language relied on by the Court, the Trustees could not have validly implemented the termination action under any circumstances. While plan terms can appear to be formulaic and dry, in fact they are dynamic and can have a significant impact on plan administration, employer cost, and employee satisfaction with those benefits.
Please contact any member of the Varnum Employee Benefits Group if you have any questions about this or any other aspect of employee benefits. (See Attorneys, upper right.)