Judge Limits GM on Making Retirees Pay for Health Care : Labor: Experts say a ‘hornet’s nest’ awaits companies that want to retroactively change terms. Auto maker is likely to appeal.
In a ruling that raises a warning flag for U.S. companies trying to cut back on health care expenses, a federal judge said General Motors Corp. cannot force certain of its retirees to help shoulder the costs of their health benefits.
GM is likely to appeal the decision, which could cost the nation’s largest auto maker scores of millions of dollars. The 119-page ruling, issued late Wednesday by U.S. District Judge John Feikens in Detroit, binds GM to promises of lifetime free health insurance that, the court ruled, GM made to about 50,000 employees who took early retirement between 1974 and 1988--many of them residents of Southern California.
Employee benefits experts said that while the ruling applies only to General Motors, other companies considering making changes in retiree benefits plans should pay close attention. A “hornet’s nest” now awaits companies that want to retroactively change the terms of retiree health benefits, unless they clearly had reserved the option to make changes--or discontinue--health care benefits, said Raymond C. Fay, the Washington attorney representing the retirees.
In Detroit, Francesca Bruno, a benefits consultant with New York-based A. Foster Higgins & Co., said companies need to take a careful look at their retiree health care plans and that retirees should examine the terms as well.
“This ruling,” she said, “just has to flow across everybody’s consciousness and sink in until they ask themselves” if it can happen to them.
The ruling does not put an end to the case, originally filed by a group of white-collar retirees in Los Angeles in 1989 and moved to Detroit in 1990. Retirees attorney Fay said the next steps are to restore the retirees’ guarantees to lifetime, no-cost health care and to calculate how much money GM owes to the retirees and their families, unless GM gets special permission to appeal before the trial is completed.
Fay said the decision could cost General Motors $25 million to $40 million for each year since 1988, when it began requiring employees and retirees to bear some of the costs of their health care benefits. General Motors’ annual cost of health care rose to nearly $3.7 billion last year.
“We are disappointed with the ruling,” Richard F. O’Brien, GM vice president of corporate personnel, said in a statement. “The GM benefits package is among the best in all of industry, and we intend to maintain a competitive benefits package for our employees and our retirees.
As a basic operating procedure, however, we believe we do have the right to amend, modify or change our benefit plan.”
GM stumbled, observers said, over conflicts between what it wrote in some of the documentation of the retirement plans and in other communications designed to encourage employees to take early retirement.
Even as early-retirement incentive packages have become a crucial tool in corporate restructuring and slimming down, the drive to gain control over upward spiraling health care costs has led more and more businesses to pass along some of those costs to their employees and current and future retirees. In previous challenges to changes in retirement health care provisions, courts have allowed such changes when the companies clearly proved they had informed retirees that modifications were possible.
In the face of the ruling, some companies may just throw up their hands and not offer retirees any health care benefits, said Richard A. Kleinert, a principal in the Los Angeles office of benefits consultants William M. Mercer Inc. He said employers “may think, ‘If I don’t dot one i or cross one t , I may create this irrevocable obligation stretching on into the future.’ ”
In 1988, GM added a $750 annual deductible to its health care plans for all retirees and employees. Last year, it hiked the costs of the most common health insurance plan to $3,000 per family, attorney Fay said, and this year began requiring monthly contributions to premium costs.
In the trial, GM maintained that it had reserved the right to make changes in early-retirement plans it offered employees from 1974 to 1988. (The case does not involve employees who retired before 1974 or since 1988.) However, Ray said, a pivotal issue in the trial was a memo issued in 1980 by GM Vice President George Morris to personnel directors dealing with early-retirement issues.
Judge Feikens wrote: “Morris explicitly advised (them) to stress the importance of full health care coverage in retirement without cost to all employees considering early retirement. But he failed to mention the possibility that health care benefits could be reduced or even eliminated after the employee retired.”
Ray said he thinks companies will continue to offer early-retirement incentives, but “the rules of the game have changed significantly.”
