The Supreme Court has ruled that Section 510 of the Employee Retirement Income Security Act of 1974 ("ERISA"), which makes it unlawful for an employer, among other things, to discharge an employee for the purpose of interfering with the participant's right to attain a "benefit," applies to welfare plans (medical, disability and life insurance plans) even though such benefits are not vested and the employer may terminate the plan at any time.
Inter-Modal Rail Employees
In Inter-Modal Rail Employees, et al. v. Atchison, Topeka and Santa Fe Railway Co., et al., 117 S. Ct. 1513 (1997), a subsidiary of the Atchison, Topeka & Santa Fe Railway Co. ("ATSF") outsourced the cargo handling at ATSF's Hobart Yard Facility. ATSF stated that one reason for terminating the employees and outsourcing the cargo work to a non-related company (which, in fact, hired many of the terminated employees) was to reduce employee benefit costs, including welfare benefits. Generally, under current law, employers may reduce or terminate welfare benefits at anytime.
ATSF argued that since welfare benefits were not vested benefits, the affected employees could not claim that ERISA had been violated. Further, if ATSF could terminate the welfare plan at any time, and thus deny benefits, then discharging the employees would not violate Section 510 of ERISA.
District Court and Court Appeals
The District Court granted ATSF's motion to dismiss the Section 510 claims. The terminated employees appealed. The Ninth Circuit affirmed in part and reversed in part the District Court's decision. The Court of Appeals for the Ninth Circuit reinstated the employees claim for interference with their pension benefits stating that Section 510, "protects plan participants from termination motivated by an employer's desire to prevent a pension from vesting." However, the Court of Appeals affirmed the dismiss for interference with the welfare benefits, stating that employees have to right to future, anticipated benefits.
Supreme Court's Decision
The Supreme Court reversed the Ninth Circuit and held that welfare benefits are protected under Section 510 of ERISA. The Supreme Court reasoned that ERISA provides for the protection against the interference of a "right" to which a participant may become entitled under a plan. The Court noted that for ERISA purposes, a "plan" includes both welfare and retirement plans. Accordingly, the Supreme Court remanded the case to the Ninth Circuit for review in light of its opinion.
A Right Way to Eliminate Welfare Benefits
Many commentators have opined that this decision is nothing more than a demonstration that there is a right way and a wrong way to eliminate welfare benefits. The Supreme Court reaffirmed that when the welfare plan document permits, an employer may reduce or terminate welfare benefits. Thus, the right way to proceed, apparently, is to first eliminate or terminate the welfare plan, then terminate the employees.
It should be noted that in this case the welfare benefits provided by ATSF were pursuant to a collective bargaining agreement. Therefore, ATSF lacked the ability to unilaterally reduce or terminate the welfare benefits and could not terminate the welfare plans until the collective bargaining agreement expired.
In Conclusion
The Inter-Modal Rail Employee case has come to stand for three propositions. First of all, under ERISA, an employer is free to modify, adopt, or terminate their welfare benefit plans. Secondly, the employer must follow the formal procedures in the plan to make those changes. Third, the employer cannot reduce benefits for the purpose of interfering with the attainment of any right to which a plan participant may be entitled to in the future.