Retiree Medical Benefits and Obligations
By Mark Johnson, Ph.D., J.D.
As baby boomers prepare for retirement, many are planning on future medical benefits from their employers. Unfortunately, many retirees will be disappointed to learn that these benefits can be changed or terminated. Studies indicate the number of companies with 200 or more workers offering retiree health insurance fell from 66% in 1988 to 33% in 2005.
This article explores several key provisions of retiree medical benefits and associated ERISA guidelines.
What is Meant by “Retiree Medical” Benefits?
Also known as “post-retirement health insurance,” these benefits are typically employer-sponsored benefit plans for retired workers 55 and older.
In an earlier article titled “Other Post Employment Benefits (OPEB),” this author discussed the fact that certain specified non-pension benefits are offered after the employee retires or leaves a company in exchange for their current service. Retiree medical benefits represent the vast majority of these OPEB obligations.
How Does ERISA Apply to Retiree Medical Benefits?
If a plan is sponsored by an employer or union (other than a government employer or public employee union, or non-profit employer), it is governed by ERISA.
ERISA governed benefits plans typically contain a “reservation of rights” provision in both the Summary Plan Description (“SPD”) and the more technical official plan document, which allows the plan sponsor to change or terminate all or parts of the plan. Plan changes must be implemented and communicated in accordance with ERISA guidelines.
Where Can a Beneficiary Learn More about their Retiree Medical Benefits?
Every beneficiary of an ERISA-sponsored benefits plan should have a current copy of their Summary Plan Description, which outlines the benefits offered by the plan.
A plan sponsor is required to provide this SPD when a new plan takes effect; when an employee becomes eligible to participate in a plan; or upon written request of a plan participant or beneficiary. There are also updating requirements if significant plan changes are made. If a beneficiary has lost a copy of their plan, they can contact the plan sponsor for a replacement copy.
The customer service department of the plan sponsor, or its third party administrator, should also be able to help a beneficiary understand the benefits to which they are entitled under a plan.
What is the Risk Associated with Retiree Medical Benefits?
Retiree medical benefits represent an unfunded financial liability that must be reflected on the sponsor’s financial statements. Given the economic pressures facing corporations today, many employers are taking steps to reduce or eliminate this costly obligation.
When retiree medical plans are terminated, the beneficiaries who are not yet Medicare eligible must find individual coverage in the private health insurance market. As the cost of healthcare accelerates, these benefits become increasingly expensive to replace.
What Should a Plan Participant Do?
If a beneficiary discovers that their plan includes a “reservation of rights” provision, there is very little action that can be taken. Many plan participants do not read or fully understand their plan documentation, and learn of their exposure only after a benefit is withdrawn.
Union plans operate under different terms, although unions typically do not represent people who are already retired.
When Have Retiree Medical Disputes Resulted in Litigation?
There have been many cases where unexpected changes to post-employment pension and medical benefits have resulted in lawsuits. Examples include:
- Rexam Inc., v. US Steelworkers et al., United States District Court, District of Minnesota. This retiree medical plan class action involved plan amendments, reservation of rights language, and the intersection of several collective bargaining agreements.
- Romero v. Allstate. This lawsuit was triggered when Allstate insurance agents were reclassified as "independent agents." In the conversion process they lost their company pension plan and post-retirement medical-insurance benefits.
- In re Unisys Corporate Retiree Medical Benefits ERISA Litigation, the court held a plan sponsor liable for breach of contract despite the fact that the plan sponsor included specific “reservation of rights” language in its Summary Plan Description (“SPD”). Here the sponsor’s other benefit communications, including retirement counseling, were not consistent with the reservation of rights language.
Beneficiaries who have questions about their retiree medical benefits should speak with their plan sponsor to learn about the specific benefits available to them and have a contingency plan for bridging their medical coverage to Medicare, if they are considering early retirement.
Plan sponsors should be clearly and consistently communicating both the benefits provided to their employees and retirees and the potential duration of those benefits.
About the Author. Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778 or www.erisa-benefits.com.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
Contact ERISA Expert Dr. Mark Johnson
You can reach Dr. Johnson via email or by phone at 817-909-0778. He is available to confidentially discuss a benefits matter.
Click on the link to read about his representative ERISA cases.