You asked whether a private-sector employer can alter the terms of a retirement health plan.

SUMMARY

The answer depends on the facts. This office is not authorized to give legal opinions and this report should not be construed as one. A constituent who believes his employer has erroneously changed the terms of his retiree health benefits should seek the advice of an attorney knowledgeable about employee benefits.

An employer's ability to change retiree health benefit terms primarily depends on whether it unambiguously reserved the right to alter the terms in the Summary Plan Description (SPD) of pension and welfare benefit plans that the federal Employee Retirement Income Act of 1974 (ERISA) requires the employer to file with the U.S. Labor Department and to give its employees.

No law requires employers to provide retiree health benefits, and in general, they are free to cut or eliminate benefits unless they (1) have made a specific promise to maintain specific health care benefits for a definite period of time or for life and (2) have not included a reservation of right to alter benefits in the SPD. ERISA specifically exempts welfare plans from the minimum benefit vesting requirements that apply to retirement pension plans.

In addition, an employee may be entitled to benefits under the plan's original terms if the employer's SPD reservation is expressed in very ambiguous terms and the employee can prove through other documents or evidence that the employer made a specific promise. These documents may include items such as correspondence, materials handed out at office presentations, brochures, medical plan booklets, or employee handbooks that explain employee benefits. Many courts require these employees to prove that they relied on their employer's representations to their detriment or that extraordinary circumstances exist.

Employers have won the vast majority of reported lawsuits concerning retiree health benefits reduction or elimination because they typically include a clear reservation of rights in the SPD and where the reservation is expressed in ambiguous language, courts have generally sided with them. However, a few courts have sided with employees.

DETERMINING WHETHER EMPLOYER IS ABLE TO ALTER TERMS

Identifying the SPD

ERISA was enacted to govern private-sector administration of pension plans and welfare benefit plans. Most private-sector plans come under its jurisdiction. A retiree health plan is a form of welfare benefit plan and ERISA requires these plans to be established and maintained pursuant to a written instrument (29 USCA § 1102(a)(1)). Employers must provide employees with an SPD, which describes the plan's terms, within 90 days of their first plan-participation date (29 USCA § 1022(a)(1)). Subsequent SPDs that the employer gives its employees may or may not replace the original SPD they receive.

SPDs may take many forms, and are not necessarily titled "Summary Plan Description." Any document that meets the 12 ERISA-specified criteria qualify as an SPD. In order to qualify a document must contain:

1. the name and type of plan administration;

2. the name and address of the person designated as the agent for service of legal process, if the person is not the plan administrator;

3. the name and address of the administrator;

4. names, titles, and addresses of any trustee or trustees (if they are not the administrator);

5. a description of the relevant provisions of any applicable collective bargaining agreement;

6. the plan's participation and benefits eligibility requirements;

7. a description of the provisions providing for nonforfeitable pension benefits;

8. circumstances which may result in disqualification, ineligibility, or denial or loss of benefits;

9. the source of plan financing and the identity of any organization through which benefits are provided;

10. the date of the end of the plan year and whether the records of the plan are kept on a calendar, policy, or fiscal year basis;

11. the procedures to be followed in presenting claims for benefits under the plan; and

12. the remedies available under the plan for the redress of claims that are denied in whole or in part (29 USCA § 1022(b)).

ERISA requires employers to give employees a copy of their SPD within 30 days upon request. Employees may also obtain a copy from the U.S. Labor Department within 30 days of a request. They may do so by contacting the Pension and Welfare Benefits Administration, Division of Technical Assistance and Inquiries at (202) 219-8776.

Determining Whether the Employer Reserved the Right to Alter Terms of Welfare Benefit Plans

The employee should look at his SPD and related documents to find promises that health benefits after retirement will continue at a specified level for a certain period of time. If no such language exists, it is unlikely that the employer will have to provide any benefits.

If there is language describing retiree health benefits, the employee should look for a reservation of rights to eliminate or alter benefits. Typical language might state "the company reserves the right to modify, revoke, suspend, terminate, or change the program, in whole or in part, at any time."

Where Employer's Reservation in SPD is Ambiguous or Nonexistent

If the employer's reservation in the SPD is ambiguous the employee may use extrinsic evidence (e.g., an retirement benefit brochure) to prove that the employer explicitly promised to provide a certain level of retiree health benefits. However, this depends on the degree of ambiguity. Courts have largely sided with employers in excluding extrinsic evidence where the reservation is ambiguous, but employees have been successful in a few cases (see, e.g., Jensen v. SIPCO, Inc., 38 F.2d 945; Stewart v. KHD Deutz of America, Corp., 980 F.2d 698).

If the SPD contains no reservation of right, employees should have little difficulty using extrinsic evidence to prove that the employer promised to provide certain retiree health benefits.

TREND IN PRIVATE SECTOR REDUCTION/ELIMINATION OF RETIREE HEALTH BENEFITS

In December 1990, the Financial Accounting Standards Board, a leading influence on generally accepted accounting principles ("GAAP") issued Financial Accounting Standard (FAS) 106. This standard required companies, many for the first time, to calculate the present cost of providing future health benefits for retired employees and include this amount in their annual financial statements. At the time, one analyst estimated that this amount represented about $1 trillion in costs to American companies. In response, many companies began reducing or eliminating retiree health benefits.

Before FAS 106 employers reported retiree health care costs on a pay-as-you-go basis. But FAS 106 required them to report these benefits on an accrual basis. The result was, that employers had to significantly reduce their current income.

LJ:ts