In what stands as a warning to all employers that offer enhanced welfare benefits as a retirement incentive during a reduction in force, in DeBoard v. Sunshine Mining and Refining Co., 2000 U.S. App. LEXIS 6212 (10th Cir. 2000), the Tenth Circuit Court of Appeals recently held that the language contained in an employer's early retirement incentive offer created a "plan" under ERISA, providing those employees who accepted the early retirement offer with lifetime medical benefits, leaving the employer with no ability to terminate its retiree medical obligation to the individuals who accepted the incentive.
The plaintiffs were employees of Woods Petroleum Corp. ("Woods") who were sent letters stating that if they accepted Woods' early retirement offer, they and their eligible dependents would be entitled to receive health care under the company's group hospitalization plan, fully paid by the company until the time of the retiree's death. The letters also stated that the retirees would be allowed to continue group dental participation at the company's expense and would also receive retiree and spouse life insurance with the premiums paid by the company. Based upon these letters, the plaintiffs voluntarily retired effective Oct. 31, 1985. The plaintiffs and their spouses received medical, dental, and life insurance benefits, at no cost, through July 1995.
At the time the letters were sent, the original employer, Woods, merged with Sunshine Mining and Refining Company ("Sunshine"). The merger agreement provided that Sunshine would not terminate or modify any existing welfare benefit plans for a period of ten years. After the expiration of the stand-still period, Sunshine attempted to terminate dental and life insurance coverage and to impose $500 monthly health insurance premiums on retirees. The individuals who retired based upon the early retirement incentive letter brought suit to enforce the terms of the letters.
The plaintiffs sued Sunshine and Woods in the U.S. District Court for the Western District of Oklahoma. The district court ruled in favor of the plaintiffs on their claims for entitlement to no cost health insurance. However, the court concluded that the letters did not contain an explicit promise of company-paid premiums for dental and life insurance benefits. The Tenth Circuit affirmed the district court's decision.
On appeal, the defendants argued that Woods did not intend to create a new plan, but rather to describe the benefits to which the plaintiffs were entitled under Woods' medical plan. The defendants argued that the existing plan contained a clause reserving the company's right to amend or terminate the plan at any time. Based upon that plan language, the defendants argued that the plaintiffs could not vest in lifetime benefits.
The court rejected the defendants' argument, holding that the company had intended to create a new welfare benefit plan for employees who elected to retire under the early retirement program.
The court held that the letters from the company created a new and separate ERISA welfare benefit plan. The letters satisfied the minimum requirements for establishing an ERISA plan by describing:
This case highlights the need for employers to carefully draft all communications with employees regarding benefits. If the letters involved in this case had contained some simple disclaimer language (e.g., "in accordance with the terms of the plan," or "subject to the company's right to amend or terminate the plan at any time"), the result of the case could have been quite different.
The plaintiffs were employees of Woods Petroleum Corp. ("Woods") who were sent letters stating that if they accepted Woods' early retirement offer, they and their eligible dependents would be entitled to receive health care under the company's group hospitalization plan, fully paid by the company until the time of the retiree's death. The letters also stated that the retirees would be allowed to continue group dental participation at the company's expense and would also receive retiree and spouse life insurance with the premiums paid by the company. Based upon these letters, the plaintiffs voluntarily retired effective Oct. 31, 1985. The plaintiffs and their spouses received medical, dental, and life insurance benefits, at no cost, through July 1995.
At the time the letters were sent, the original employer, Woods, merged with Sunshine Mining and Refining Company ("Sunshine"). The merger agreement provided that Sunshine would not terminate or modify any existing welfare benefit plans for a period of ten years. After the expiration of the stand-still period, Sunshine attempted to terminate dental and life insurance coverage and to impose $500 monthly health insurance premiums on retirees. The individuals who retired based upon the early retirement incentive letter brought suit to enforce the terms of the letters.
The plaintiffs sued Sunshine and Woods in the U.S. District Court for the Western District of Oklahoma. The district court ruled in favor of the plaintiffs on their claims for entitlement to no cost health insurance. However, the court concluded that the letters did not contain an explicit promise of company-paid premiums for dental and life insurance benefits. The Tenth Circuit affirmed the district court's decision.
On appeal, the defendants argued that Woods did not intend to create a new plan, but rather to describe the benefits to which the plaintiffs were entitled under Woods' medical plan. The defendants argued that the existing plan contained a clause reserving the company's right to amend or terminate the plan at any time. Based upon that plan language, the defendants argued that the plaintiffs could not vest in lifetime benefits.
The court rejected the defendants' argument, holding that the company had intended to create a new welfare benefit plan for employees who elected to retire under the early retirement program.
The court held that the letters from the company created a new and separate ERISA welfare benefit plan. The letters satisfied the minimum requirements for establishing an ERISA plan by describing:
7 intended benefits;
7 intended beneficiaries;
7 the source of financing;
7 procedures for receiving benefits; and
7 an ongoing administrative scheme.
The court found that a reasonable person would have interpreted the letters to provide an ongoing commitment by the employer to provide the benefits, and that the letters unambiguously guaranteed lifetime benefits to employees who participated in the early retirement plan, but limited to the level of coverage provided to the company's active employees.7 intended beneficiaries;
7 the source of financing;
7 procedures for receiving benefits; and
7 an ongoing administrative scheme.
This case highlights the need for employers to carefully draft all communications with employees regarding benefits. If the letters involved in this case had contained some simple disclaimer language (e.g., "in accordance with the terms of the plan," or "subject to the company's right to amend or terminate the plan at any time"), the result of the case could have been quite different.