ERISA-Fourth Circuit Holds That An Employer Cannot Reduce Retiree Health Benefits Without Following The Procedure InThe Collective Bargaining Agreement

In Quesenberry v. Volvo Trucks North America Retiree Heathcare Benefit Plan, No. 10-1491 (4th Cir. 2011), the issue was whether a collective bargaining agreement (a “CBA”) prevented Volvo from making unilateral changes to retiree health benefits, after the CBA had expired. Upon reviewing this issue, the Fourth Circuit Court of Appeals (the “Court”) determined that, as a matter of law, Volvo was not permitted to make these changes, unless it followed the mechanism set forth in the CBA.

The CBA at issue had “Coverage” and “Cost” provisions. The Coverage provision stated that Volvo would continue coverage under the Volvo-UAW health, dental and prescription drug programs (the “Programs”) for retiree participants for the duration of this Agreement. The Cost provision specified and limited Volvo’s financial obligations towards the Programs’ retiree health coverage. It also included a negotiated mechanism to deal with burdensome costs. First, the Cost provision established a VEBA to accept Volvo’s contributions and disburse retiree health benefits. Then, the Cost provision said that, in the event that the VEBA was projected to be exhausted within a calendar year, Volvo and the UAW were required to meet to discuss how to reduce healthcare costs. If those negotiations proved unsuccessful, Volvo could charge each retiree for any costs over the limits set forth in the Cost provision.

Volvo later announced that it intended to reduce the Programs’ retiree health coverage . This suit ensued under the LMRA and ERISA, on behalf of Volvo employees who had retired prior to the expiration of the CBA. In analyzing the case, the Court said that, to determine whether retiree health benefits must continue after the expiration of the CBA, the Court must determine the intent of the parties to the CBA, as evidenced by the CBA’s language. Here, the Cost paragraph, and its negotiated mechanism to deal with burdensome costs, was intended to prevent Volvo from making unilateral changes after the CBA had expired. In particular, the VEBA was not projected to be exhausted, thus triggering the mechanism, until nine years after the CBA was to expire. The CBA required Volvo to make a large contribution ($1.585 million) to the VEBA, providing about 40% of its assets, on the very last day of the CBA’s term, making it almost impossible for the VEBA’s assets to run out prior to the CBA’s expiration. Also, unlike the Coverage provision in the CBA, the Cost provision does not contain any “durational” language (e.g., the provision declares itself to apply only for the life of the CBA). As such, the Court concluded that the parties intended that Volvo could not unilaterally reduce the Programs’ retiree health coverage, but can make reductions only pursuant to the CBA’s negotiated mechanism.

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