Supreme Court Says Retiree Health Benefits Aren’t Vested Unless the Contract Says So

Resolving a split among circuits, the U.S. Supreme Court ruled on Monday that unionized retirees cannot claim that their retiree health benefits vested at the time of retirement unless the collective bargaining agreement expressly states that.

Last Monday, the court issued its much anticipated decision in M&G Polymers USA v. Tackett, et al. which many hoped would unify among the circuits the rule on vesting of retiree health benefits under collective bargaining agreements. The facts in M&G Polymers are very representative of the issues addressed in courts across the country.  Plaintiffs are retired union employees. At the time that they retired, a collective bargaining agreement was in place that provided, among other benefits, that retired union members would be eligible for health insurance that was paid for by the employer at varying levels depending on the employee’s years of service.  This contract provision remained essentially unchanged for a number of years until the defendant company, like many employers, found it to be a necessary business decision to begin to require retirees to pay the entire cost of their health insurance.  The plaintiffs, a group of retirees under the collective bargaining agreements that provided the generous benefit, sued under the theory that their rights to retiree health care benefits vested at the time of their retirement, even though the collective bargaining agreement contained no specific language to that effect, and the employer was therefore contractually obligated to maintain those benefits for their lifetimes.

The district court ruled in favor of the employer but the 6th Circuit overturned that decision. It held that the question of duration of the benefits should first be determined by the express language of the agreement, but that the terms of the collective bargaining agreement at issue contained inherent ambiguities as to the duration of that provision because, among other things, the language referred to events in the future, which implied that the provision would survive the expiration of the agreement. The 6th Circuit held that because the true meaning of the retiree insurance provision was ambiguous, that extrinsic evidence should be allowed to determine the true intent of the parties.

The Supreme Court majority was not persuaded by the 6th Circuit rule that reference to events in the future rendered the provision ambiguous as to duration, therefore allowing evidence outside of the contract terms to ascertain the parties’ intent. The Court held “ …when a contract is silent as to the duration of benefits, a court may not infer that the parties intended those benefits to vest for life.”

This decision clarifies both 7th Circuit and Illinois state court rulings on the subject, which have been in accord with the 6th Circuit on these matters. The Supreme Court decision in M&G Polymers makes it pretty clear that a court must first look to the express contractual provision to determine duration of benefits derived from that agreement and silence on a subject leaves no room for inference.

The Supreme Court decision may be a lifesaver for some employers who continue to struggle to contain health insurance costs. A mandate to maintain retiree health insurance pursuant to expired collective bargaining agreements for those already retired members resulted in two or more tiers of benefits depending on whether the employee was currently employed or retired. It forced some employers to maintain costly insurance programs for retirees. Now employers should carefully examine collective bargaining agreements to ensure that they do not contain language which grants lifetime benefits or certain benefit levels. If the agreements are silent as to duration of the benefits, employers are free to alter the benefits of the already retired to conform with current contractual agreements.