A key Supreme Court case could shake up advisers who work with union employees and retirees whose ability to obtain health care benefits through retirement hangs in the balance.
The Supreme Court on Monday heard arguments on M&G Polymers USA LLC v. Tackett, a crucial case that could determine the fate of retirees receiving lifetime health care benefits negotiated through collective-bargaining agreements.
At its core, the litigation centers on the presumption — also known as the Yard-Man inference — that health care benefits granted via a collective-bargaining agreement vest once an employee retires and continue through the person's lifetime.
A PIVOTAL CASE
Retiree Hobert Tackett, a slate of retirees and the union that represented them initially sued M&G in the U.S. District Court in Ohio in 2007, alleging that the employer had breached its collective-bargaining agreement by shifting “a large part of the costs of those [health care] benefits” from the employer to the retirees. The plaintiffs claimed that M&G had terminated or planned to terminate the benefits of retirees who were unable to pay or otherwise didn't pay those additional costs.
Though the district court found in favor of the retirees in 2012, M&G appealed the case to the 6th U.S. Circuit Court of Appeals, where the decision was upheld. Now, the case is being heard in the Supreme Court.
“It's going to set a precedent,” said Ronald Mann, a professor at Columbia Law School. “A lot of these contracts are sufficiently unclear, and this case can determine what they mean.” Put simply, collective-bargaining agreements that were drawn up in the 1960s and 1970s didn't openly place limitations on lifetime health care benefits. Those provisions are coming home to roost as retirees live longer lives and health care costs skyrocket.
Mr. Mann notes that as many as 40% to 50% of collective-bargaining agreements are unclear on the provision of vested health care benefits, and so their fates may hinge how the Supreme Court proceeds on Tackett.
UNDERSTANDING THE TERMS
For advisers who work with union retirees and employees, it means that it's time to get familiar with the terms under which those clients receive retiree health care. It also helps to sketch out a Plan B for those lifetime health care expenses.
James A. Cox III, an adviser with LPL Financial, works with telecommunications and energy industry employees and retirees. His telecom clients, members of the Communications Workers of America, aren't promised retiree health care in perpetuity. Rather, the conditions of that coverage are negotiated every three years, meaning clients who retire before Medicare eligibility at age 65 hold their breath every time renegotiations come around.
“It used to be that the union could negotiate [new contracts] at a five-year period, but now three years is the norm,” said Mr. Cox. “If you retire between 55 and 60, you have two or three contracts to go through before you hit Medicare. That's where the cost can be the highest.”
In order to manage the possibility that the terms of a retiree's health care can change, Mr. Cox goes through each case, determining all of the details including spousal coverage. In some situations, clients can purchase reasonably priced insurance coverage on their own.
TRUE COST OF CARE
The cost of handling premium payments upfront for health care, however, can be as high as $1,100 — and that's a real shock for retirees who otherwise expected those expenses to be handled by their former employer. “They don't really have the wherewithal to adjust to an expense that's tantamount to a new mortgage payment,” Mr. Cox said. “If the contracts change, you can lose your health care coverage, and it's a tough situation for these people.”
Meanwhile, Dave Grant, founder of Finance for Teachers, notes that his teacher clients have the benefit of being public employees. Their retiree health care packages are tied to their pensions, and an adjustment to either would violate the state constitution.
For other clients who are still employed in the private sector, however, he has modeled what a reduction in pension benefits would look like down the road. The worst case scenario: What if a retiree is eligible for 50% to 75% of his or her pension benefits? If he or she is eligible for health care in retirement, what would it look like if the premiums doubled? The health care concern might drive those clients to other options, including the health care exchanges, Mr. Grant said.
Other retirees who left the private-sector workplace before Medicare eligibility have found other ways to stay on track.
“There were people who got different jobs after retirement for the health care,” Mr. Grant said. “It would have been more expensive to price out [an individual] policy the older they got.”
