In a dramatic departure from prior decisions, the United States Court of Appeals for the Sixth Circuit, sitting en banc, recently held that General Motors has the right to change or terminate the medical benefits provided to some 84,000 non-union retirees.
The plaintiffs in Sprague v. General Motors Corporation filed suit in 1988 after GM announced its intention to modify retiree health coverage. GM asked retirees who elected a traditional fee for-service medical plan to pay a $200 annual deductible ($250 for families) and 20% co-payments (up to an annual maximum co-payment of $500).
The actual plan documents and most of the required ERISA summary plan descriptions ("SPDs") expressly reserved GM's right to amend or terminate the retiree medical plan. The plaintiffs, however, based their breach of contract, estoppel and ERISA breach of fiduciary duty claims on Ianguage in those SPDs, which stated: "Your basic health care coverages will be provided at GM's expense for your lifetime." Previously, in Edwards v. State Farm Mutual Auto. Ins. Co., a three-judge panel of the Sixth Circuit held that "statements in a summary plan are binding and if such statements conflict with those in the plan itself, the summary shall govern." Applying Edwards, the Sprague plaintiffs argued that the "lifetime" language in the SPDs governed, and constituted a binding promise to provide retirees with free, lifetime medical benefits.
While not explicitly overruling Edwards, an eight judge majority of the Sixth Circuit rejected the plaintiffs' argument on the breach of contract claim that the "lifetime" language in the SPDs vested the retiree medical benefits, rendering them "forever unalterable." ERISA's vesting requirements do not apply to welfare benefit plans. Accordingly, employers are generally free under ERISA to modify or terminate retiree medical benefits "for any reason at any time." "Because vesting of welfare plan benefits is not required by law," the Sixth Circuit stated, "an employer's commitment to vest such benefits is not to be inferred lightly; the intent to vest must be found in the plan documents and must be stated in clear and express language." The plaintiffs did not dispute that the plan itself and most of the SPDs expressly reserved GM's right to change or terminate benefits. Rather, the plaintiffs argued that the "lifetime" language in the SPDs created an ambiguity, allowing the court to look outside the plan documents to determine GM's intent. The Sixth Circuit disagreed: "We see no ambiguity in a summary plan description that tells participants both that the terms of the current plan entitle them to health insurance at no cost throughout retirement and that the terms of the current plan are subject to change." The court also stated that, although not all of the SPDs contained reservation of rights language, "[a]n omission from the summary plan description does not, by negative implication, alter the terms of the plan itself... GM's failure to include in some summaries a notice of its right to change the plan does not trump the clearly-stated right to do so in the plan itself" Edwards, the Sixth Circuit declared, "does not apply to silence."
The Sixth Circuit also held that the plaintiffs' estoppel claim failed as a matter of law because the plan and most of the SPDs "unambiguously reserved to GM the right to amend or terminate the plan." "In the face of GM's clearly-stated right to amend," the Sixth Circuit held, "reliance on statements allegedly suggesting the contrary was not, and could not be reasonable or justifiable, especially when GM never told the plaintiffs that their benefits were vested or fully paid-up."
Finally, the Court held that GM did not breach the fiduciary duty it owed to the retirees under ERISA as the plan administrator. The plaintiffs relied on the Supreme Court's holding in Varity Corporation v. Howe that an employer acts in a fiduciary capacity under ERISA when making representations to its employees about their benefit plan. While acknowledging that Varity "teaches that GM may have acted in a fiduciary capacity" when explaining its medical benefits to retirees, the Sixth Circuit held that GM did not breach that duty because it did not make misrepresentations to the retirees: "GM never told the early retirees that their health care benefits would be fully paid up or vested upon retirement. What GM told many of them, rather, was that their coverage was to be paid by GM for their lifetimes. This was undeniably true under the terms of GM's then-existing plan." According to the Sixth Circuit, the "lifetime" language in the SPDs may have stated GMs current intentions, but it cannot be expected to foreclose the possibility that changing financial conditions will require a company to modify welfare benefit plan provisions at some point in the future."
Three judges dissented, stating that GM did create a vested night to lifetime health care benefits and criticizing GM's 44corporate shortsightedness." "When General Motors was flush with cash and health care costs were low," the dissent stated, "it was easy to promise employees and retirees lifetime health care.... Rather than pay off those perhaps ill-considered promises, it is easier for the current regime to say those promises were never made. There is the tricky little matter of the paper trail of written assurances of lifetime health care, but General Motors, with the en banc majority's assistance, has managed to escape the ramifications of its now-regretted largesse." According to the dissent, the majority's opinion "is heads, General Motors wins; tails, the employees lose."
It is unclear how much remains of Edwards after the Sprague decision. However, because the Court did not explicitly overrule Edwards, the language in an SPD still governs over contrary language in a welfare benefit plan.