Another round of retiree benefits litigation on the horizon

September 2, 2012

The U.S. Postal Service recently publicized its challenges in funding its retirees’ health care benefits — it owes $5.5 billion for 2011. And the postal service is not alone. Many public and private employers are struggling to fund retiree benefit obligations that continue to increase as health care costs rise and life expectancies grow longer.

Health care reform made employers reevaluate their health care benefit programs, so many also took a closer look at their retiree medical obligations.

Health care reform may be a catalyst to employers reducing or terminating their retiree medical benefit coverage. Some employers are motivated to eliminate coverage because their retirees will be able to obtain coverage — i.e., a so-called “soft landing” — through the state-sponsored health insurance exchanges that health care reform requires by 2014.

Under this approach, an employer contributes a set amount to health reimbursement accounts that the retirees may use to purchase medical insurance through the exchanges. This allows the employer to limit its financial exposure while still providing its retirees with access to meaningful coverage.

In developing benefit strategies, especially to retirees, employers are also examining litigation risks. Any change in benefits brings uncertainty and a potential for litigation, but there seems to be more at stake with retiree medical benefits, which can touch thousands of lives and involve millions, if not billions, of dollars. Recent lawsuits challenging the reduction or termination of retiree medical benefits have made headlines, and employers have found themselves negotiating huge settlements in those cases.

Special attention to the complex issues involved in modifying retiree medical coverage can help reduce litigation risk. A firm understanding of the terms and conditions of the retiree medical “promise” is necessary prior to an employer taking action to modify, limit or otherwise terminate retiree medical coverage. This means that the employer must review prior communications to employees and retirees as well as the governing plan documents. Employers also need to consider how they can bind retirees to the new retiree medical terms, which could include filing a declaratory action in federal court.

Retiree medical coverage is highly individualized and can vary widely — even among retirees of the same employer. Employers should carefully weigh all options prior to implementing any retiree medical exit strategy.

James R. Napoli is a Washington-based management-side lawyer in the employee benefits, executive compensation and ERISA litigation practice center and head of law firm Proskauer’s health care reform task force. Kara L. Lincoln is an associate in Proskauer’s ERISA litigation group in New Orleans.

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