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Funding retiree health benefits.

Is an employer responsible for fully funding its retirees' lifetime health benefits? The Sixth Circuit Court of Appeals recently affirmed a district court's decision that, indeed, an employer does have such a responsibility

The plaintiffs were retirees or surviving spouses of retirees of J.I. Case Co., which was a wholly owned subsidiary of Tenneco until 1994 when it was spun off and renamed Case Equipment. It is now CNH America. In 1996 Tenneco merged with El Paso National Gas to form El Paso Tennessee Pipeline.

The United Auto Workers (UAW) had negotiated collective bargaining agreements with Case that required the agreed-upon group insurance and pension plan to run concurrently In 1995 the UAW and Case signed a letter of agreement that seemed to cap Case's liability. During the years 1998-2003, El Paso increased the retiree portion of health insurance premiums from $0 to $561 per month.

The plaintiffs sought an injunction in district court alleging that El Paso had breached its labor agreements under the Labor-Management Relations Act and the Employee Retirement Income Security Act. The district court granted their request. El Paso appealed the decision.

Result. For the plaintiffs. The Sixth Circuit held that while employee medical benefits don't normally come with the same vesting rights as pensions, parties can agree that these benefits should vest. Relying on UAW v. Yard-Man, Inc., the court looked to the letter of agreement for (1) the explicit language, (2) the words and phrases used and (3) the overall context of the agreement. The plaintiffs provided booklets, notices and memoranda to document their contention that the employer intended to vest the plans. The court concluded that, because the agreement used similar language to refer to both the group insurance and the pension plan, the parties intended both plans to vest. In addition, the court held that the original intent of the UAW/Case letter of agreement was to limit the impact of funding on the financial statements, not to limit the company's funding responsibility.

The increasing numbers of retirees, rising health care costs and the growing trend of cost-shifting medical insurance premiums from employers to retirees ensure that other courts will address this issue. To support potential future claims, both currently employed and retired taxpayers should maintain all necessary documentation pertaining to their benefit packages.

* Yolton v. El Paso Tennessee Pipeline, 435 F2d 571 (CA-6).

Prepared by Michael H. Brown, CPA, PhD, assistant professor of accounting Tabor School of Business, Millikin University, Decatur, Ill.
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Author:Brown, Michael H.
Publication:Journal of Accountancy
Date:Aug 1, 2006
Words:412
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