We have a new Sixth Circuit decision regarding “vested” retiree health care benefits that is likely to be of concern to many employers, United Steel, Paper and Forestry, Rubber, Manufacturing Energy, Allied Industrial And Service Workers International Union, AFL-CIO-CLC v. Kelsey-Hayes Company. You may recall that in the last significant Sixth Circuit decision on this topic, Reese v. CNH America LLC, the Court recognized that health care had changed over the years, and concluded that the employer could unilaterally modify a retiree health plan, provided that the modifications were reasonable.  That decision seemed to put the Sixth Circuit more in line with other circuits that had ruled on these issues, and gave employers some relief.  But it appears that relief was short-lived.

Oversimplifying this a bit, the 2003 Kelsey-Hayes collective bargaining agreement provided that retirees would be provided with establish a health insurance plan, “either through a self-insured plan or under a group insurance policy or policies issued by an insurance company . . . .” and “The Company shall contribute the full premium or subscription charge for health care coverages.”  The agreement contained a provision regarding changing benefits, but those changes were required to be made by mutual agreement. Plaintiffs worked for a plant that was shut down in 2006.  In 2012, TRW Automotive, which had purchased Kelsey-Hayes, announced that it was eliminating its traditional group health care plan coverage. It was establishing health reimbursement accounts (“HRAs”). With respect to this group, it made an initial contribution of $15,000 per retiree and spouse, and promised a $4,800 credit for each retiree and spouse for 2013, with no commitment regarding subsequent years. The company retained the right to cease providing retiree coverage.

In Kelsey-Hayes, the Court (in a majority opinion written by Judge Griffin) concluded that the employer did not have the authority to create health reimbursement accounts that it promised to fund for only two years, and to reserve the right to eliminate all coverage thereafter. The Court found TRW liable as a successor for the collective bargaining agreement commitment. In an opinion concurring in part and dissenting in part, Judge Sutton agreed with this much of the of the opinion. The majority opinion further explained that reasonable modifications were only permitted in CNH America because of the text of the collective bargaining agreement and issued a permanent injunction, “requiring a return to the ‘status quo ante.’” Judge Sutton, who had written the CNH America opinion, by the way, disagreed, reminding us that the Court had said:

Retirees, quite understandably, do not want lifetime eligibility for the medical-insurance plan in place on the day of retirement, even if that means they would pay no premiums for it. They want eligibility for up-do-date medical insurance plans, all with access to up-to-date medical procedures and drugs.

Judge Sutton viewed the injunction as improperly ruling that even if the company had agreed to fund the HRAs for life, and even if the individuals obtained better and more flexible coverage, this would not satisfy the company’s obligation. He characterized this case as highlighting “the perils of handcuffing a company to one mode of providing retiree benefits.” This opinion explains that participants were guaranteed access to an individual insurance plan, and provided with a broker to select an insurance package. It appears that the Treasury, DOL and HHS already handcuffed the company from doing this in 2014 and beyond (see, e.g., IRS Notice 2013-54). But does this decision mean that if the company maintains a defined contribution private exchange, it must maintain a standalone insured plan for this group of retirees? Stand-alone retiree plans are excepted from the Patient Protection and Affordable Care Act (“PPACA”), which means the retirees could lose benefits they would have had (such as coverage of preventive care and coverage of dependents to age 26). Further, presuming the stand-alone plan is affordable and provides minimum value, the retirees will be ineligible to purchase, with a premium credit and cost-sharing reduction, an individual exchange policy that might include better benefits under the minimum essential coverage rules. This brings us back to the question: do retirees really want 2006 health care?

In a concurring opinion in Kelsey-Hayes, Judge Merritt opines that the Court is not handcuffing the employer, as the opinion only applies to the present circumstances, and there are many ways circumstances could change in the future. Like implementation of PPACA, perhaps?

Employers are continuously reviewing their employee compensation and benefits costs, and determining how much total cost they are willing and able to bear. Many employers are exploring, or have already made, significant changes regarding health care benefits. In 2018, the 40% nondeductible excise tax (Cadillac tax) is anticipated to hit many plans maintained pursuant to collective bargaining. Determining how those plans will be redesigned to minimize the tax, or how this tax will be funded, is critical. Employers, especially those in the Sixth Circuit, may be handcuffed by collective bargaining agreements and have trouble extending those changes to employees and retirees protected by those agreements. Accordingly, we continue to urge employers to make health care coverage a priority in the collective bargaining process. Employers may not be able to do anything about collective bargaining agreements that were in existence prior to an acquisition (and this is one of the reasons why due diligence is so important), but they may be able to better protect their interests in current negotiations.