The increasing and unpredictable costs of retiree medical benefits pose a significant threat to the financial health of employers who sponsor these plans, leading employers to consider various strategies for reducing or eliminating those costs. The strategies include restricting future eligibility for retiree health benefits, requiring greater retiree cost sharing, and eliminating retiree health benefit coverage altogether. A recent case, Sloan v. BorgWarner, Inc, illustrates the litigation hazards faced by employers who unilaterally modify retiree health benefits that are collectively bargained.

An employer’s right to modify or terminate health benefits for retired employees is regulated by ERISA and, in the case of collectively bargained benefits, by the Labor Management Relations Act (LMRA). Importantly, neither ERISA nor the LMRA confers on retirees a statutory right to enjoy these benefits for life. In other words, neither ERISA nor the LMRA creates a statutory right to vesting for retiree medical benefits. But benefits may nevertheless vest by contract, that is, by the terms of the governing plan documents. Absent plan document provisions that vest retiree medical benefits, an employer may unilaterally modify or terminate retiree medical benefits. In the collectively bargained retiree health benefits context, courts will first look to the language of the collective bargaining agreement and other negotiated documents. If the collective bargaining agreement and related documents do not address vesting or are ambiguous, the courts will then look to other evidence of the parties’ intent, including, for ERISA plans, the SPD. If the collective bargaining agreement unambiguously vests retirees in these benefits, a court may not consider any other evidence in determining the parties’ intent. A court will not find that benefits are vested absent an affirmative showing of an intent to vest these benefits. The retiree (or union, in some cases) has the burden of proving an intent to vest.

In May 2009, BorgWarner closed one of its plants and unilaterally implemented modifications to the health care benefits of certain retirees and surviving spouses. Shortly thereafter, suit was filed on behalf of approximately 1,750 affected retirees and surviving spouses of retirees who retired from BorgWarner under a number of different collective bargaining agreements. The issue before the court was whether BorgWarner had contractually agreed to continue retiree benefits as provided under the terms of the collectively bargaining agreement once the agreement had terminated. If so, the unilateral changes implemented by BorgWarner would not have been permitted. In an effort to avoid a potentially long and costly trial, both parties asked the court to rule on the issue of vesting, based principally on the terms of the collective bargaining agreement and health insurance documents. The court ruled that these documents were ambiguous about the issue of vesting and that genuine issues of material fact exist on the question of the parties’ intent to vest or not. As a result, the court declined to decide the issue of vesting and ordered that the matter proceed to trial. (Sloan v. BorgWarner, Inc., E.D. Mich. 2014)

Employers that maintain collectively bargained retiree medical benefits should not assume these benefits cannot be unilaterally modified or terminated. It is possible, based on the language of the collective bargaining agreement and related health care documents, that they can be. As noted above, neither ERISA nor the LMRA create a statutory right to vested, lifetime retiree medical benefits, and such benefits vest only by virtue of the terms of the collective bargaining agreement and governing plan documents. However, because litigation can ensue, as evidenced in Sloan v. BorgWarner, a decision to unilaterally modify or terminate retiree health benefits should be implemented only after all relevant facts and circumstances have been carefully evaluated with the assistance of counsel. Where a collective bargaining agreement is silent or ambiguous, and extrinsic evidence of vesting is lacking, an employer may reasonably choose to unilaterally modify or terminate benefits if the consequences of continuing the coverage outweigh the costs of litigation. In some circumstances, employers in this situation might also consider seeking court approval of the right to unilaterally alter a retiree health insurance plan.