Terminating Retirement Benefits

The problem of companies reneging on promises to provide medical and other benefits to retirees is in the news pretty much every week, if not every day. Company after company, retirement plan after retirement plan, benefits that beneficiaries believed were theirs for life are being significantly reduced, or even terminated. In some industries, most prominently the auto industry, the promise to pay such benefits to retirees has become, at least according to the companies and to many independent analysts, an unsustainable cost that threatens the industry's ability to compete on price in the marketplace.

The problem isn't going away. An article today in the National Law Journal provides an excellent overview of the problem, noting in part that "[a] recent report by Standard & Poor's found that post-retirement benefits, mostly medical costs, were underfunded by nearly $300 billion among the firms in the S&P 500 stock index," and that "[t]he trend in industry after industry is to eliminate retiree benefits."

ERISA obviously impacts attempts by companies and their employee benefit plans to reduce or end benefits that the recipients believed were a lifetime retirement commitment. The National Law Journal article provides a summary of the state of the law on this impact, noting:

In 1974 Congress created the Employee Retirement Income Security Act to establish fiduciary standards to protect retiree pensions and other benefits. Although pensions were vested under the law and difficult to alter, health benefits were not and could be changed more readily.
The 7th Circuit has one of the toughest standards for retirees attempting to block loss of benefits. The court has said that a company had to have misled plan participants about the terms in order to have breached its fiduciary obligation.
In the case of 347 CNA Financial Corp. retirees whose early retirement health care allowance was cut off, the court found the promise of "lifetime" coverage meant "good for life unless revoked or modified," Vallone v. CNA Financial Corp., 375 F.3d 623 (2004).
By contrast, the 2nd Circuit has provided a more expansive interpretation of ERISA's fiduciary standard by focusing on the plain meaning of the word "lifetime." The court found that a company might violate its fiduciary duty if it provides a lifetime benefit, but the right does not vest. Abbruscato v. Empire Blue Cross & Blue Shield 274 F.3d 90 (2001).
And the 3rd Circuit, in In re Unisys Corp. Retiree Medical Benefit "ERISA" Litigation, 58 F.3d 896 (1995), said that a plan administrator who knows but fails to provide information, to the detriment of beneficiaries, breaches its fiduciary duty.
Lastly, the 6th Circuit has said that if a company misleads the retirees, regardless of whether it was negligent or intentional, a breach of fiduciary duty exists. James v. Pirelli Armstrong Tire Co. 305 F.3d 439 (2003)