Photo of What does "will be insured" actually mean?

What does "will be insured" actually mean?

Brinton M. Wilkins
Utah Employment Law Letter

Balancing obligations to provide health and life insurance benefits to retirees with other legitimate business needs can be tricky. Although retirees depend on the benefits, employers may need to modify benefit plans for legitimate business reasons. Various laws, including the Employee Retirement Income Security Act (ERISA), try to reconcile the competing interests. Nevertheless, when benefits change, retirees may feel betrayed. Indeed, that is what happened when Sprint-Nextel Corporation and its spinoff company, Embarq Corporate, modified prescription drug and life insurance benefits for their retirees. Read on to see how Sprint-Nextel and Embarq carefully crafted their retiree benefits plans to ensure that appropriate changes could be made.

Change to benefits

In 2005, Sprint-Nextel and Embarq modified the prescription drug benefits they provided to retirees eligible for coverage under Medicare Part D. In 2008, Embarq eliminated “company-sponsored medical coverage and the prescription drug subsidy provided to Medicare eligible retirees and Medicare-eligible dependents of retirees.” The companies, which had provided several life insurance plans to retirees, eliminated basic coverage for retirees participating in a specific plan and capped benefits at $10,000 under all other retiree plans.

Several retirees initiated a class action lawsuit alleging that the changes violated ERISA. Specifically, they asserted they had vested rights that Sprint-Nextel and Embarq could not modify. The complaint also alleged that the changes violated the Age Discrimination in Employment Act (ADEA).

The trial court disagreed and dismissed the ERISA and ADEA claims, decisions that the 10th Circuit ultimately upheld.

ERISA and vested benefits

All of the affected health and life insurance plans qualified as “welfare benefit plans” under ERISA, and employers are “generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans.”

An exception exists, however, if an employer has contractually agreed to provide retirees with vested benefits. In that case, the employer “may not unilaterally modify or terminate the welfare benefit plan that establishes those benefits.” For rights to be vested, the controlling documents and contracts must express an unequivocal intent on the part of the employer to provide vested rights.

Thus, the retirees argued that the controlling documents granted them vested rights. For instance, one document stated, “Your coverage under the Retiree Medical Plan ends when you die, or you do not pay your share of the cost of your coverage.” And other documents stated: “Basic life insurance coverage ends on the date of your death.”

The 10th Circuit pointed out that the documents contained so-called reservation of rights provisions stating that Sprint-Nextel and Embarq reserved “the right to change or discontinue any or all benefits under this program, or any statement in this summary plan description, at any time.” The documents also stated, “Just as medical coverage can change in the future for active employees, so can the coverage that is available to retirees.” And there were provisions reserving to Sprint-Nextel and Embarq “the right to amend any part of the Plan, to change the method of providing benefits, or to terminate any or all of the plans.”

Regarding the statement that “your coverage under the Retiree Medical Plan ends when you die,” the 10th Circuit clarified that was not an unequivocal promise that benefits will never change. Rather, it was simply a recitation of the “self-evident message that a retiree’s medical coverage terminates when she dies.”

The retirees pointed to one set of documents that stated that their life insurance “will be” equal to their active employee coverage, subject to a 50 percent reduction “on the fifth anniversary of retirement.” But the 10th Circuit said the “will be” language addressed the amount of the benefit, not its duration.

Similarly, the 10th Circuit held that provisions stating that benefits “will continue after retirement” and that retirees “will be insured” could not reasonably be interpreted as promises of lifetime benefits, particularly in light of language stating that “the Company reserves the right to amend, discontinue or terminate the Plan and/or Plan benefits.”

Furthermore, the court clarified that a reservation of rights permitting amendment or termination of a benefits plan “for reasons of business necessity or financial hardship” could not be read to imply a promise of lifetime benefits. Rather, the language allowed changes to benefit plans so long as the changes were based on a business decision.

In short, because the controlling documents and contracts contained appropriate reservations of rights and did not contain language that constituted an unequivocal agreement to provide lifetime benefits, Sprint-Nextel and Embarq were able to change, modify, amend, or terminate the welfare benefit plans.

ADEA disparate impact claim fails

Under the ADEA, employers can be held responsible if an action that is not intended to be discriminatory nevertheless results in outcomes that look indistinguishable from outcomes caused by age discrimination. To establish a so-called disparate impact claim under the ADEA, an employee has to first demonstrate that the challenged employment practice actually created a disparate impact, which is usually done with statistics. The employer can avoid liability, however, if it can show that its practice was based on “reasonable factors other than age.”

In this case, although the retirees claimed that the reduction or termination of their life insurance created a disparate impact, they did not provide any statistics or evidence establishing the alleged discrimination.

Furthermore, Sprint-Nextel and Embarq showed that their decisions were based on “reasonable factors other than age.” Specifically, they provided evidence that the decisions were motivated by a desire to reduce costs and make the benefits they provided consistent with those provided by other companies, not discriminatory intent. Sprint-Nextel and Embarq also provided evidence that the changes would result in approximately $4 million in annual savings.

Health insurance-related ADEA claim fails

The retirees argued that Sprint-Nextel and Embarq violated the ADEA when they reduced or terminated prescription drug benefits for retirees who were Medicare-eligible. According to the retirees, under the federal Older Workers Benefit Protection Act of 1990, which amended the ADEA, employers cannot provide an “employee benefit plan that discriminates on the basis of age . . . except when the employer establishes entitlement to one of the affirmative defenses Congress has provided.”

Sprint-Nextel and Embarq successfully argued, however, that Section 9 of the ADEA authorized the Equal Employment Opportunity Commission (EEOC) to exempt employers from any or all provisions of the ADEA “as it may find necessary and proper in the public interest.” Under that authority, in 2007, the EEOC exempted from all ADEA restrictions any “alteration, reduction, or elimination of health benefits for retirees who are eligible for Medicare health benefits.”

Thus, Sprint-Nextel and Embarq’s actions did not violate the ADEA because they acted in accordance with a defense created by the EEOC under Congress’s direction. Fulghum v. Embarq Corp. , 2015 WL 1905798 (10th Cir., 2015).

Lessons learned

This decision emphasizes the importance of carefully drafting language that protects an employer’s ability to make necessary business-related changes to its benefits plans. The bulk of the 10th Circuit’s ruling was a careful analysis of the controlling contract language. Because none of the contracts showed an unequivocal intent to provide lifetime benefits and the documents contained clear reservations of rights, the retirees were left making the difficult argument that phrases such as “will be” implied an agreement to provide lifetime rights. Finally, as with claims filed under Title VII of the Civil Rights Act of 1964 and other discrimination claims, this ruling highlights how important it is to base business decisions on legitimate business concerns.

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