Retiree Health Benefits Discussed In The Supreme Court

February 2, 2015
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The U.S. Supreme Court recently ruled that courts should apply traditional contract principles to determine whether retiree health benefits survive the expiration of a collective bargaining agreement (CBA).

The decision in M&G Polymers v. Tackett expressly rejected the Sixth Circuit Court of Appeals’ long-standing decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716, F.2d 1476 (6th Cir. 1983) that retiree health benefits are presumed to vest for life unless the collective-bargaining agreement expressly provides otherwise..

The Facts of the Case

When M&G Polymers USA, LLC (M&G) purchased the Point Pleasant Polyester Plant in 2000, it entered into a CBA covering its union employees. The CBA provided that retirees, along with their surviving spouses and dependents, would “receive a full Company contribution towards the cost of [health care] benefits” and that such employee benefits would be provided “for the duration of [the] Agreement.” The agreement did not, however, address whether such retiree health care benefits would continue beyond the duration of the CBA. Following the expiration of the CBA, M&G announced that it would require retirees to contribute to the cost of their health care benefits. Several retired employees sued M&G, claiming that the CBA created a vested right to continue receiving free health care benefits. On appeal and consistent with the Yard-Man precedent, the Sixth Circuit ruled in favor of the retirees.

The Supreme Court’s Decision

The Supreme Court found that, when a CBA fails to address the duration of retiree health benefits, a court should not presume that such benefits vest for life. Rather, the court should apply ordinary principles of contract law: “Courts should not construe ambiguous writings to create lifetime promises,” Justice Clarence Thomas wrote on behalf of the unanimous Court. He further added that “retiree health care benefits are not a form of deferred compensation.”  According to the Court, the Sixth Circuit erred in relying on the Yard-Man decision because it rested upon principles that are incompatible with ordinary principles of contract law: “Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements. That rule has no basis in ordinary principles of contract law. And it distorts the attempt to ascertain the intention of the parties.”

The Message for Employers

The Supreme Court’s decision in M&G Polymers v. Tackett significantly changes retiree health care benefits expectations in both the private and public sectors, particularly regarding disputes involving existing agreements. While the decision arguably favors employers under current agreements, employers must be mindful to attend to the language of CBAs and other employment contracts, including those establishing ERISA plans, and expressly address whether retiree health care benefits intentionally vest for life.