Yesterday, in M&G Polymers USA, LLC v. Tackett, the Supreme Court vacated longstanding Sixth Circuit precedent that had created a presumption of vesting of collectively bargained retiree welfare benefits, such as health or life insurance benefits. In doing so, the Court reiterated the primacy of a contract’s written terms in evaluating whether a plan sponsor intended to confer irrevocable (or vested) welfare benefits to retirees. Although the opinion addresses collective bargaining agreements, it should also provide employers and plan sponsors with helpful authority regarding their ability to modify retiree welfare benefits outside the collective bargaining context.
The Plaintiffs are retirees who had worked in a plant owned by M&G Polymers. They were covered under a collective bargaining agreement and a pension and insurance (P&I) side agreement, which provided that retirees who met certain eligibility requirements would receive a full company contribution towards the cost of health care benefits. The P&I agreement provided for renegotiation of its terms after three years, and included a general duration clause stating that the employer would provide health care benefits “[e]ffective January 1, 1998, and for the duration of this Agreement thereafter.” Several years later, after the P&I agreement had expired, M&G announced that it would begin requiring retirees to contribute to the cost of their health care benefits. The retirees sued, alleging that M&G had promised them free lifetime health care benefits.
The district court ultimately ruled in favor of the retirees, and the Sixth Circuit affirmed, based largely on its precedent starting with International Union, United Auto, Aerospace, and Agricultural Implement Workers v. Yard-Man, Inc. (6th Cir. 1983). Since Yard-Man, the Sixth Circuit had effectively created a presumption of vesting in the context of collectively bargained retiree welfare benefits. Under this line of cases, agreements are construed in light of the “context” of labor negotiations, which in the Sixth Circuit’s view means that retiree welfare benefits, being “status” benefits to which those who attain the pertinent status as retirees are entitled, carry an inference that they continue, rather than being “left to the contingencies of future negotiations.” For example, the Sixth Circuit:
- Has found the language “will continue to provide [benefits] for Pensioners aged 65 and over” to confer lifetime benefits;
- Has found an intent to vest where an agreement’s durational provisions do not specifically refer to retiree benefits; and
- Has concluded that retiree benefits normally “are interminable.”
The Sixth Circuit continued to follow this approach in M&G Polymers.
The Court Strikes Down the Presumption in Favor of Vesting of Retiree Welfare Benefits
The Supreme Court unanimously rejected the so-called Yard-Man presumption underlying the Sixth Circuit’s decision in M&G Polymers, vacating and remanding the case to the Sixth Circuit. It reaffirmed the familiar principle that retiree welfare benefits, unlike pension benefits, are not vested under ERISA. Although a plan sponsor may choose to confer a vested welfare benefit by including such a promise in the applicable plan document or collective bargaining agreement, the Court held that collective bargaining agreements must be interpreted according to ordinary principles of contract law. The Court held that the Sixth Circuit’s approach “violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements,” a presumption that “has no basis in ordinary principles of contract law.”
The Court’s Guidance on Principles of Contract Interpretation
The Court ordered the Sixth Circuit to review the agreement at issue under “ordinary principles of contract law,” and provided guidance on those principles:
Specific vs. General Durational Clauses: The Court rejected the Sixth Circuit’s requirement that any durational clause specifically refer to retiree welfare benefits in order to prevent vesting. The Court held that this approach conflicts with the contract law principle that “the written agreement is presumed to encompass the whole agreement of the parties.” This principle should help sponsors of plans with general durational clauses that do not expressly refer to retiree welfare benefits.
Obligations Ordinarily Cease Upon Expiration of the Agreement: The Court held that the Sixth Circuit ignored the principle that contractual obligations ordinarily cease upon termination of a bargaining agreement. While this does not necessarily preclude parties from negotiating for benefits that continue after an agreement expires, the Court held that “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.”
Ambiguous Contracts Should Not Be Construed to Create Lifetime Promises: The Court also explained that the Sixth Circuit failed to consider the traditional principle that courts should not construe ambiguous writings to create lifetime promises, and that “traditional rules of contractual interpretation require a clear manifestation of intent before conferring a benefit or obligation.” This aspect of the Court’s opinion should be helpful to plan sponsors where a plan document does not clearly state an intent to provide irrevocable benefits but lacks an express durational or reservation of rights clause.
Industry Custom: The Court held that although a court may look to known customs or usages in a particular industry to determine the meaning of a contract, the court may not rely on its own unsupported suppositions. Instead, the parties must prove those customs or usages with actual evidence.
By rejecting the use of a presumption in favor of vested retiree welfare benefits, M&G Polymers promotes an employer’s flexibility to modify retiree welfare benefit programs in light of changing business conditions, and will make it more difficult for retirees to demonstrate a right to irrevocable welfare benefits. Although the opinion involved a collective bargaining agreement, the Court’s opinion is grounded on case law and statutory provisions that apply to both collectively bargained and non-union benefits. Thus, much of the Court’s guidance should apply to retiree welfare benefits outside of the collective bargaining context.