OVER THE PAST 10 years, with the rising cost of health insurance, many companies have phased out company-funded retiree health care benefits. As a result, much litigation has been spawned throughout the country by retirees claiming that they had "vested" rights in their medical benefit plans and that the employer could not unilaterally change or terminate such plans.

In Lacey v. Collins & Aikman Products, Co., February 18, 2004, the US District Court for the District of New Hampshire addressed this issue and upheld the employer’s right to unilaterally terminate "free" health care coverage for retirees. The plaintiff Arthur Lacey had retired in November 1978. As part of his retirement benefits, both Lacey and his wife received health plan coverage free of charge. Collins & Aikman acquired Lacey’s former employer in December 2001. The new owner notified the retirees that because of the sale they would no longer be eligible for coverage under the former company’s retirement plan, but they would be eligible for coverage under Collins & Aikman’s plan.

Under Collins & Aikman’s plan, retirees would be responsible for paying premiums for coverage as well as an annual deductible, and the co-pay for prescription drugs would increase. The health coverage would no longer be provided "free of charge" as it had been for the prior 23 years.

Following receipt of the notice, Lacey filed suit against both his former employer and Collins & Aikman, challenging their right to terminate his free benefits. He claimed that the employer violated the federal Employee Retirement Income Security Act (ERISA) by failing to provide health coverage to him and his wife free of charge as had been provided under the prior retiree medical plan. Lacey claimed that the right "vested" at retirement, and asserted that any change breached fiduciary duties under ERISA.

In granting the employer’s motion for summary judgment, and following US Supreme Court precedent, Judge Joseph A. DiClerico, Jr. ruled that when a plan sponsor alters or amends the terms of a welfare benefit plan, the sponsor is not acting as a "fiduciary" under ERISA. Therefore, the plan sponsor does not breach fiduciary duties under ERISA by altering or amending a welfare benefit plan. The court also rejected Lacey’s claims that the right to free medical coverage for life "vested" upon his retirement. The court noted that under ERISA, welfare plans unlike pension plans, do not vest automatically. According to Supreme Court precedent, employers or other plan sponsors are generally free un der ERISA, for any reason at any time, to adopt, modify or terminate welfare plans.

In an earlier decision, the Second Circuit observed that in enacting ERISA, Congress rejected the requirement that welfare benefits vest because the costs of such plans are subject to fluctuating and unpredictable variables, unlike the costs of pension plans, which depend on ascertainable actuarial calculations.

Like many retirees, Lacey sought to rely upon letters, employer statements, and annual summaries that he understood to have been a promise of free medical benefits for his life and for the life of his wife. While acknowledging that an employer could agree contractually to vest welfare benefits outside of ERISA, the court found that Lacey failed to carry the burden of showing that the employer intended to vest the free benefits for his lifetime.

As the cost of health care continues to escalate, many employers are contemplating changes to their retiree medical benefit plans for prospective and past retirees, especially after purchasing a company that has offered generous retiree medical benefit plans. Some, however, have been hesitant to make such unilateral changes believing that the welfare plans "vested" upon retirement as do pension plans, absent express reservation of rights. The weight of authority, however, generally permits an employer to unilaterally amend or terminate welfare benefits without violating ERISA.

Retirees can be expected to attempt to block such efforts to unilaterally change medical insurance plans; yet, while such challenges can be expensive to defend, employers for the most part have prevailed in their right to unilaterally amend welfare plans—even as applied to persons who have already retired under the plan.

However, there are three growing areas where such retiree suits have had some success. Two of the areas involve cases in which the employee can show that the employer "vested" such benefit outside of ERISA. These cases usually involve collectively bargained welfare plans in which rights under the Labor Management Relations Act come into play, or negotiated severance packages where the employer expressly promised lifetime welfare benefits in the separation agreement in exchange for consideration, including a release, by the employee.

The third growing area involves what has become known as "Varity –type claims," based on the Varity v. Howe decision of the Supreme Court in 1996. The court, however, cautioned the lower courts that they should be conservative in determining whether to allow the same kind of remedies as ultimately permitted in Varity.

Varity-type cases usually require a showing of "deliberate deceit" by fiduciaries in the course of persuading employees to participate in a corporate reorganization or downsizing with the intent not to provide the promised welfare benefit or with the promised benefit being illusory at the time the promise was made. Such cases are limited and distinguishable from those in which the employer "hoped" to provide the benefit at the time the statement was made, but changed circumstances led the employer to later amend the plan.

As a general rule, there is no breach of fiduciary duty arising from a settlor function to amend an ERISA plan, and the employer need not start every correspondence to an employee with the caveat that the plan may be changed in the future.

Before unilaterally terminating welfare benefits or changing welfare benefits, especially for retirees, employers should seek individualized counsel based on the specific facts. Absent intentional deceit at the time the promise was made and absent a negotiated welfare benefit, employers should prevail against challenges by retirees to block amendment of a welfare plan. Efforts to assert state law claims also would fail, as ERISA will preempt virtually all state law theories, with rare exception.

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