Can an Employer Reduce or Eliminate Retiree Benefits?

Private-sector employers aren't obligated to offer health benefits to retirees, and even if they do offer such benefits, employers can reduce or terminate that coverage absent an agreement to the contrary.

So what constitutes an agreement to keep providing the benefits? The central question in three class-action complaints filed against Honeywell International Inc. earlier this year is whether the company was obligated to continue providing retiree benefits under the terms of various collective bargaining agreements (CBAs).

The company sent letters in December 2015 informing the relevant retirees and their beneficiaries that their coverage will be terminated on Dec. 31, 2016.

The former employees are "mainly from many of the company's legacy manufacturing sites, including Fostoria, Mich., Greenville, Ohio, and Stratford, Conn.," a company spokesman said. Honeywell is a multinational company that designs, develops and manufactures a variety of commercial and consumer products.

The company spokesman said Honeywell decided to "terminate medical and prescription drug coverage for certain retirees and their covered dependents" because the "individual Medicare supplemental insurance market has matured and has provided more options for Americans to purchase affordable and comprehensive health insurance."

The retirees, who were previously union-represented employees, alleged that Honeywell violated the Employee Retirement Income Security Act (ERISA) and the Labor-Management Relations Act by cutting their coverage.

Controlling Documents

Whether an employer can elect to terminate retiree benefits is a matter of contract law, explained Gregory Ossi, an attorney with Venable in the Washington, D.C., area.

There are several documents that may govern the benefits that are provided to employees and their beneficiaries, including the plan documents, the summary plan description, an insurance contract and a bargaining unit's CBA.

Ossi said that even if a CBA or other controlling document provides for lifetime benefits, the agreement may also state that the employer reserves the right to make changes to the coverage.

"This language usually trumps other language in the agreement," he noted.

Ossi said that employers should be careful not to make promises that contradict their ability to terminate benefits. There is a theory developing in the courts that if the controlling documents say one thing, but plan participants have been repeatedly told something else by the plan administrator, those communications might indicate the employer's intent to provide lifetime benefits.

He added that this argument generally wasn't available under ERISA, but more courts have recently recognized this type of "estoppel" theory.

Provide Notice

It is important for an employer that wants to terminate coverage to understand the plan documents and any applicable CBA, Ossi said.

Where there is a clear reservation of rights, the employer may have the authority to reduce or eliminate benefits, but communication with the plan participants is key, he explained.

"A best practice is to give retirees plenty of advance notices to help bridge the gap of uncertainty," he said. Employers may want to help retirees navigate through their other options and find a new plan that can cover them. It's a small expense that can have benefits for the employer and the retirees in the long run, he added.

In the Honeywell cases, the retirees "will have had a full year to carefully review their coverage options and chose a plan that best suits their cost and coverage needs," the company spokesman said.

The cases are Cooper v. Honeywell Int'l, Inc., W.D. Mich., No. 1:16-cv-471; Fletcher v. Honeywell Int'l, Inc., S.D. Ohio, No. 3:16-cv-302; Kelly v. Honeywell Int'l, Inc., D. Conn., No. 3:16-cv-543.