Unfunded retiree health care benefits have been the elephant in the room for decades. Together with unfunded pension liabilities, they threaten the survival of both private companies and municipalities. One need only recall that prior to its bankruptcy, General Motors spent more on health care per vehicle than it did on steel.

Recent court decisions have turned the tide somewhat, allowing employers to avoid financially crippling liability to retirees for health care costs. A new decision by the Third Circuit Court of Appeals, applying to pre-Medicare retiree benefits in a union workforce, continues that trend.

The story begins with the principle that while employers have a duty to negotiate with their unions over health care and other fringe benefits for employees, they have no duty to negotiate over benefits to be provided to retirees. This rule does not prevent employers from agreeing to provide such benefits, and a court will generally enforce a contractual obligation where it exists.

The union contracts that typically grant retiree health care benefits have been around for years in heavily unionized industries. Yet most of these contracts have been silent on whether health care benefits are vested for life at the time an employee retires, or whether the obligation to provide such benefits expires with the contract. Earlier this year the Supreme Court ruled that if a collective bargaining agreement is silent on the question of vesting, the benefits are not vested for life.

That kicked the ball back to unions and retirees to try to show that the parties intended to vest negotiated health care benefits for life, and that the language of the contract was subject to an interpretation that this was the intent. Normally, questions of contract interpretation are decided by arbitration. If the union could find some hook in the contract to get the claim before an arbitrator, therefore, its chances of locking in lifetime retiree health care benefits were greatly improved.

Armed with this incentive, unions have looked to collateral documents such as summary plan descriptions or side letters that are frequently referenced in the union contract. Do those provide the hook to get an arbitrator to order a benefit that the federal courts will not find to be implied?

On August 29, a unanimous panel of the Third Circuit answered this question in Cup v. Ampco Pittsburgh Corp. Two holdings of the court are of importance. First, mere reference to side documents about benefits for employees and retirees does not incorporate those side documents into the union contract. Second, even a history of using the grievance and arbitration provisions to resolve disputes about retiree benefit entitlement will not serve to incorporate those side documents into the union contract. In the absence of some ambiguity in the union contract itself, extrinsic evidence of past practice should not be used to add terms to a contract that is plausibly complete without them. On this basis, the court ruled that, notwithstanding an agreement letter between the parties referencing such benefits, the company was not required to arbitrate the union’s claim for retiree health care benefits.

Employers who do not want to be locked into lifetime retiree health care obligations now have a greater opportunity to avoid such claims. To take advantage of this opportunity they need to be vigilant in removing from their union contracts any language suggesting that such benefits last longer than the life of the union contract. Second, they should be careful that references to side agreements or summary plan descriptions do not incorporate those documents into the contract and vice versa. These actions will not preclude an employer from providing retiree health care benefits when it desires to do so, but they will save the employer from an open-ended commitment at a later time when it may not be able to fund the obligation.